Why is the Rupee Depreciation happening so fast?

Context

The Indian Rupee has depreciated significantly against US Dollar, reaching a historic low of ₹94 per $1.

Q1. What is the difference between depreciation, devaluation, appreciation and revaluation?

1. Depreciation: Fall in value of currency due to market forces (demand–supply).
2. Devaluation: Fall in value of currency due to government/central bank decisions.
3. Appreciation: Rise in value of currency due to market forces.
4. Revaluation: Rise in value of currency due to government decisions.

Q2. What are the basic concepts of Balance of Payments (BoP) and Demand-Supply?

Balance of Payments: BoP is divided into:

1. Current Account
   1. Visible Items (Goods):
      1. Usually Imports > Exports → Trade Deficit
      2. Trade happens in dollars → Demand for dollar increases
   2. Invisible Items (Services): Can be in surplus (Exports > Imports)
   3. Overall, India usually has a Current Account Deficit (CAD).
2. Capital Account Includes foreign investments:
   1. FDI (Foreign Direct Investment): Long-term investment. Can be incoming or outgoing
   2. FPI (Foreign Portfolio Investment): Short-term investment. Can be incoming or outgoing
   3. India generally has a capital account surplus, but recently FDI and FPI inflows have slowed down and FPI outflows have increased.

Demand–Supply Concept

1. Demand > Supply → Value increases
2. Supply > Demand → Value decreases

Q3. Why is the Indian Rupee depreciating currently?

Reasons can be divided into three categories:

1. Domestic (India-specific) Reasons:
   1. Trade Deficit: Imports > Exports → More dollars going out
   2. Higher Current Account Deficit (CAD): More dollar outflow → higher demand for dollar
   3. Foreign Investment Trends: Outflows > Inflows due to
      1. Policy uncertainty (tax, labour laws) → lower investor confidence
      2. High fiscal deficit (high expenditure, low revenue) → more borrowing
      3. High inflation → reduces rupee purchasing power → less attractive to investors
2. Global Factors
   1. Geopolitical Tensions (Iran–US conflict): Increases global uncertainty and investors move towards safe haven currencies like US Dollar.
   2. Rising Oil Prices: Oil is priced in dollars. Importing countries like India need more dollars → demand increases
3. United States Factors
   1. Strong US Dollar: Global trade is largely conducted in US Dollar (safe haven currency)
   2. US Federal Reserve Policy: Higher interest rates in US dollar-denominated assets which gives better returns and attracts investors.
   3. US Tariffs on Indian Goods: Indian exports become costlier. Exports decrease → dollar inflow reduces. Lower supply of dollar → rupee depreciates.