Monetary Economics
As INR continues to fall against the Dollar, it’s imperative to look at the impact of falling currencies on a nation’s economy.
The dance of currencies on the international stage is a constant one, with fluctuations impacting a nation’s economic well-being. A falling currency can be a double-edged sword. On the one hand, it can make a country’s exports more attractive. For instance, Vietnam’s textile industry boomed in 2023 as the Vietnamese Dong weakened, making their apparel more competitive against rivals like China. This can be a boon for export-driven economies, but it comes with a caveat: imports become more expensive. Countries like India, which rely heavily on imports like energy, felt the pinch in 2023 as the depreciating Rupee exacerbated the burden of high global crude oil prices, pushing up inflation.
The ripple effects of a falling currency can be far-reaching. As the cost of imports rises, consumers often face higher prices, leading to inflation. This erodes purchasing power and impacts citizens’ standard of living. Countries like Argentina and Turkey have recently grappled with this issue, with their weakening currencies fueling inflation to staggering levels.
Furthermore, a falling currency can deter foreign investors. They perceive their investments as being worth less when converted back to their home currency. This can lead to capital flight, where investors withdraw their funds from the depreciating currency, further weakening it. Concerns about the stability of the Turkish Lira in 2023, for example, led to a significant outflow of foreign capital.
However, there’s a silver lining. A weaker currency can make a country more attractive to tourists, as their foreign currency goes further. This can boost the tourism industry and generate revenue. But it’s a double-edged sword for the citizens of the depreciating currency nation, as travelling abroad becomes more expensive.
Governments often try to manage the impact of a falling currency. Raising interest rates can attract foreign investment and stabilise the exchange rate, but this can also dampen economic growth. Additionally, governments might resort to import controls or subsidies to manage price increases.
Ultimately, the impact of a falling currency depends on a country’s specific economic structure. For net exporters, the benefits of increased export competitiveness can outweigh the drawbacks. However, for import-reliant economies, the consequences can be severe. Navigating this situation requires a delicate balancing act, with governments needing to implement policies that mitigate negative consequences while capitalising on potential opportunities. Understanding how a falling currency interacts with a country’s unique economic makeup is crucial for crafting effective responses.