Is falling /devaluation /depreciation of Rupee good for the economy ?

 People often says Rupee is depreciating or falling and depreciation of Rupee is harmful for the economy. What is the reality. lets try to understand the economics behind falling of the INR.

                Recent SBI Report about depreciation of  INR in the TRUMP 2.0 regime

First we will understand different terms like devaluation and depreciation .

DEVALUATION: 

• Devaluation is a deliberate action of the government to downward adjustment of the currency with relation to other foreign currency. 
• It takes place in a pegged / Fixed exchange rate system.
• In the present times, governments avoid devaluation with certain exceptions. Like China many times has opted for devaluation so as to promote its exports. In response ,countries used to get involved in competitive devaluation of their currncies leading to "currency war".

DEPRECIATION:

• Fall in the  currency value is  controlled by market factors like economic fundamentals political stability and other related factors. 
• It takes place in a floating Exchange rate regime.
• In the present times ,this is the prevalent mechanism.

***********The devaluation and depreciation similar in the sense of their after effects .They only differ in the sense of how value of currency is falling if it is through market then it is depreciation and if it is by government order then devaluation.

Lets  understand what happens to our exports /imports if INR depreciates /devaluates.

Lets say,on 12.11.2024:

1 $=80 Rs 

On 12.12.2024, INR depreciated to the value of 

1 $ =90 Rs 

Now we have to understand the economic implication of depreciation in case of trade:

Suppose there is a buyer of pen in the international market with 10 dollars in his  pocket and the  cost of Indian pen is Rs 50.

Now in case 1 on date 12.11.2024,when he was in the market then he could buy 80*10/50=16 Indian pen

In case 2 ,On 12.12.2024,Everything remains same except depreciation of INR ie 1 $ =90 Rs, so on 12.12.2024, he can buy :90*10/50=18 Indian pen,

From the above example, it is clear that buyer can buy more pen when INR is depreciated ie in case 2 , now we can conclude that :

Export of Indian goods increases when INR is depreciated or devalued which is good for the Indian economy as it earns foreign currency.

But it does not mean that depreciating INR is always good for the economy. Depreciating rupee can be manifestation of the relative weakening of the economy (demand of INR decreases). So on arrival of Trump2.0 in USA , SBI report published in 2nd week of November 2024 says that INR may depreciate 8-10 % against dollar . 

Depreciating INR can also result in :

• Increased cost of imports 
• Increased inflation
• Increased cost of foreign borrowings 
• Reduce foreign investments because of weak economy

Maintaining the value of INR within a band is a tight rope walk which is to be ensured by RBI so as to maintain economy stable.

So, from next time don't be judge -mental merely on the sloganeering rather decipher the reality and make the people aware .