The rupee has depreciated significantly against the dollar recently.
Exactly why does the rupee fluctuate from 64 to 68 per dollar? This blog
attempts to explain the determinants of the level of rupee, but not by any
complex econometric methodology. Let’s make it simple and compare it our
fitness. It is quite an interesting analogy actually.
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Fitness
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Rupee
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When we exercise regularly we
stay fit
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When the economy performs well
regularly the rupee is stable
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When we have our diet 'in
check' it keeps us healthy
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When our inflation is 'in
check' the rupee stays healthy
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When we have sufficient sleep
with less stress, health appreciates
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When the country has sufficient
trade balance with less import demand, rupee appreciates.
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When our surrounding (i.e.
friends and family) support us for staying fit, we are encouraged to perform
better
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When our country’s surrounding
(i.e. foreign investors) support our country by investing through FDI and
FPI, the rupee is encouraged to perform better.
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On the fitness front, if any of
these factors turn discouraging and negative, we lose focus, start gaining
unhealthy fat and gradually get out of shape
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On the rupee front if any of
the above factors turn unfavourable and negative the rupee gets
unhealthy and gradually depreciates.
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With the above factors, our health and the rupee gets better or worse
gradually. However, there are also shock factors which drastically change our
health conditions. Similarly there have been temporary and permanent shifts in
the value of our rupee as well.
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If someone meets with an
accident/ fracture or is bed-ridden for couple of months, they might gain
weight excessively.
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The financial crises in 2008-09
depreciated the rupee sharply by almost 17% to Rs.48/$.
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Also, in cases where someone is
suffering from a chronic disease, as side effects of medicines etc they might
gain unusual weight.
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The European debt crises in
2011 followed by India being part of the fragile five (high fiscal and
current account deficit countries) led to another 25% depreciation in the
rupee to about Rs.61/$ by 2014.
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Let us now look at the other extreme. Remember the size zero craze or the madness of artificially reducing body fat? That didn’t work well either. People soon realised that such methods are only going to harm their bodies in the long run. We would be at our best, when we stay energetic and feel happy about our body. We must only try to achieve our ideal fitness level and maintain it. Similarly if the rupee appreciates way too much, it would be harmful for the exports competitiveness and the country in the long run. The rupee would be at its best if it is closest to its fair value and then the RBI and the Government aim to maintain it near that level.
Disclaimer: Views are personal. The only idea here is to make economics
of currency relatable and easy. There can be many more factors which affect our
health and also our currency, I have just tried to cover the important ones.
