First of all we have to understand that how the rate of Indian Rupee is determined against US Dollar or any other currency, then only we can understand that why the Indian Rupee is at record low against US Dollar.
Determination of Rate is basically a game of Demand and Supply means how much is the demand (to pay) and supply (to receive) for US dollars against Indian Rupee. During the time of Export to USA, the Indian Bank receive US dollars as payment and the Indian Bank convert the US dollars at the rate prevailing on the date when amount received and credit the amount in the account of Exporter, this creates supply of US dollar as Indian Bank receive US dollar. During the time of Import to USA, the Indian Bank pay US dollars to the exporter in United States at the rate prevailing at the time of payment for imports, this creates demand of US dollar as Indian Bank have to pay US dollars.
Currently, Indian Exports were up 14.32% year on year in July,2018 at $25.77 billion while imports clocked at $43.79 billion, an increase of 28.8% resulting in trade deficit of $18.02 billion. This is the highest monthly deficit since May 2013 when it stood at $19.1 billion. The sharp rise in India's imports is attributed to the $12.35 billion of Oil Imports, up by 57.4%, followed by higher purchases of electronics and gold. Imports of electronics rose 26.4% on year last month at $5.1 billion while gold imports up by 40.9% at $2.9 billion. Non-Oil and Non-Gold Imports in July valued at $28.47 billion has recorded a positive growth of 18.42%.
Major Commodity segments that showed positive growth in exports are engineering goods which increase 9.1%, petroleum products at 30.1%, gems & jewellery at 24.6%, organic & inorganic chemicals at 19.9% and drug and pharmaceuticals at 2.2%.
One more factor affecting the Rupee against US dollar is the depreciation in the currency of Turkey currency Lira which has depreciated more than 40% against US dollar this year due to Turkey's President's influence on economy, his repeated calls on lowering interest rate against inflation in double digits and worsening ties with United States.
RBI's foreign exchange reserves stood at $402.70 billion in the week ended on August 3,2018. RBI stated position that it does not seek to target a particular level for rupee's exchange rate and against the US dollar and uses its reserves to ease volatility in the currency market.
Effect of weak Indian rupee against US dollar
1. Fuel prices will rise as mostly the fuel is imported from outside India.
2. Laptop, smartphones and other electronic goods which are manufactured outside India and get assembled or directly imported into will become costlier.
3. Educational loans for overeas study will become costlier as you have to pay more Indian rupees against same amount of US dollars.
4. Exporters will be benefited as they earn more dollars for goods they sell overseas while Importers will be hit as they have to pay more for foreign goods.
5. Remittances for Non-Resident Indian will be on rise as their relatives in India receive more Indian rupees against same amount of US dollar.
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