If a country imports more than it exports, then the demand for the dollar will be higher than the supply and the domestic currency like Rupee in India will depreciate against the dollar.
The rupee's fall these days is mainly due to high crude oil prices, a strong dollar overseas, and foreign capital outflows.
The rupee has been on the decline since early this year, especially after supply chain disruptions in view of the Russia-Ukraine war, global economic challenges, inflation, and high crude oil prices, among other issues.
Besides, there have been heavy foreign fund outflows from the domestic markets as the foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year, outstripping the $11.8-billion sell-off seen during the Global Financial Crisis of 2008. The rupee has depreciated 5.9 per cent versus the dollar so far this calendar year.
As money flows out of India, the rupee-dollar exchange rate gets impacted, depreciating the rupee. Such depreciation puts considerable pressure on the already high import prices of crude and raw materials, paving the path for higher imported inflation and production costs besides higher retail inflation.
Meanwhile, the US Federal Reserve recently increased the interest rates, and the return on dollar assets increased compared with those of emerging markets such as India. Speculations are there could me more aggressive rate hikes by the US Fed and that may further dent the Indian currency.
How does a weak rupee impact you and the economy?
Since India mostly depends on imports, including crude oil, metals, electronics, etc. the country makes payments in US dollars. Now if the rupee is weak, it has to pay more for the same quantity of items. In such cases, the cost of raw materials and production goes up which gets passed on to the consumers.