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Devaluation of Rupee by Ajit SinghThe economic growth of a country is determined by the value of its currency. Mostly, the value of a currency is determined by the exchange rate that is the rate of conversion of the currency compared to other currencies, which in this case, the Indian Rupee is compared to the US Dollar. Several factors determine the exchange rate, and one of them is the inflation of the country. Based on this factor, the price of goods and services will only increase if they become rare, characterized by less supply and increased demand. Also, the prices are deemed to increase if money is in greater supply to the economy leading to a fall in the purchasing power and the overall currency value.

India has a higher inflation rate compared to its international competitors. As of 2013, India’s inflation rate reached 11.24%. India has a floating exchange rate system where the exchange rate of the rupee with other currency is determined by the market factors such as supply and demand. There is less demand for Indian goods as more goods are imported to India from the United States than exported to the United States from India. Since the local Indian traders have to pay for the imported goods in US dollars, they have to purchase the US dollar by exchanging it for the rupee, which helps in increasing the demand for the US dollar, and this as well helps the rupee appreciate with respect to the dollar. However, this is not the case as India has more imports than exports, implying that the exports are less compared to imports and this has contributed significantly to the fall of the rupee.

The interest rate of a country also determines the exchange rate. The Indian interest rate is 6 percent. A country that has a higher interest rate would have more investors rushing to buy the government’s bond as they expect the returns to be higher. In this case, the rupee will be in higher demand, and consequently, its value will appreciate. However, many people will go to the banks to secure loans to buy government bonds, and this means that the interest rates of the banks will be higher due to high demand. As a result, people would be discouraged from taking loans, meaning fewer investments.

The amount of public debt also determines the rate of exchange. A country with a huge amount of public debt carries a very higher risk of inflation. If the debt is too big, the investors are not confident in the ability of the country to pay back its debts, and this increases inflation and also depreciates the currency value. India’s government debt to GDP is currently at 68.3%, way up high than half, and this means that the investors might have lost their confidence in the country. As a result, the rate of inflation in India has increased, resulting in a decline in the value of the rupee.