Money depreciation indicates the economic degrowth of the country. In simple words, the value of the India Rupee has fallen by a certain percentage compared to the US dollar. It is a serious concern for the country, and the RBI must intervene.
The rupee value depends on two factors:
If the supply of the rupee is more in the economy, then its value decreases and if the supply is less and demand is more, then the value increases. The factors supply and demand are controlled by the imports and exports of the country along with some other factors.
RBI has a major role in stabilizing the economy after the fall of the rupee value. The central bank has to take major steps to control the money depreciation.
What are the Measures to control money depreciation?
RBI has several tools to control money depreciation. The simple rule that the central bank follows to control money depreciation is to increase the demand and decrease the supply of Rupee in the Indian Market. The important measures are:
• Repo Rate.
• The Repo rate is the interest rate at which RBI lends money to the banks.
• To control money depreciation, RBI increases the repo rate; this makes the banks hesitant to take money from RBI.
• The banks also will provide loans to common people at higher interest rates, which will again disinterest people from taking loans.
• In this way, the availability of the rupee in the market will gradually decrease; in other words, the supply will decrease, which in turn will increase the value of the rupee.
• Forex reserves.
• Forex reserves are the foreign currency assets kept by countries’ central banks.
• The forex assets include foreign marketable securities, monetary gold, special drawing rights (SDRs), and a reserve position in the IMF.
• Whenever there is money depreciation, RBI releases Forex reserves to control the rupee value.
• In India, RBI is the sole custodian of the Forex reserves. It uses the Forex reserves to balance the economy in times of crisis.
• During money depreciation, RBI releases foreign currency into the market and takes away India Rupee from the market.
• The consequence is it boosts the foreign currency supply and reduces the Indian currency supply, which will eventually appreciate the Rupee value.
• Other measures by RBI.
• It allows sovereign wealth funds, endowment funds, and foreign central banks to invest in government bonds.
• The central bank raises the foreign investment capital.
• The central bank helps in boosting the slowing industrial growth.
• The central bank focuses on more incentives for exports and reduces imports.
• The central bank limits foreign currency expenditure.
• The central bank persuades banks and financial institutions to raise funds in dollars abroad and lend them locally.
• The central bank requests the government to review sectors such as defense to revive their pension and insurance reforms.
The Reserve Bank of India (RBI) has calculated smart solutions to the financial crisis in India. Money depreciation is a severe financial problem for the country’s economy, but it can be easily tackled by applying the above measures.