Despite low oil prices, why do you think the value of Rupee is falling? What implications does this have on economy? Discuss.

Despite low oil prices, why do you think the value of Rupee is falling? What implications does this have on economy? Discuss.

In the usual case, high oil prices results in erosion of foreign reserves denominated in dollar and lead to subsequent depreciation of rupee. But recently, even the low prices that creates a situation of less dollars being used for purchase and should have lead to appreciation of rupee is not happening. This is because of the following reasons:
• Increase in interest rates by Federal Reserve Bank of US as an indicator of healthy US economy has led to a flight of capital to get better returns
• Competitive devaluation by currencies as an outcome of Yuan devaluation
• Reduced profits of oil-exporting nations because of low prices have reduced their demand and subsequently Indian exports have come down leading to depreciation in Indian rupee
• Low remittances from Gulf nations because Indian Diaspora have lost their jobs resulting in depreciation

This phenomenon of depreciating rupee even in scenario of low oil prices has the following impacts.
Positives-
• Depreciation results in increased exports because India is better placed in terms of other economies
• Low oil prices allows the government to phase out subsidies in diesel and fertilizers (oil is a major input in production of Urea)

Negatives-
• Consistent low prices and reduced demand can lead to recessionary tendencies in the economy
• Imports become expensive and hurts the domestic importers.