Thus, banks also charge less on their loans and it thereby raises money circulation, which leads to price rise and increase economic activity.
The Indian Rupee has fallen in value against a basket of currencies since independence in 1947.
Fiat money is the one that does not have anny intrinsic value but governments declare it as legal tender.
Fiat money can be used to discharge any public or private debt.
The article talks about the reasons why rupee has been depreciating in value, the impact of falling value of rupee on inflation and other economic factors and ways in which the current slide can be attested.
Since the falling value of rupee, and rising oil prices have been dominating the news headlines for some time now, getting into the depth of reasons behind the same would be useful for mains.Some of the other factors that influence the value of rupee: 1. If RBI wishes to prop up rupee value, then it can sell dollar and when it needs to bring down rupee value, it can buy dollars.The central bank can also influence the value of rupee by the way of monetary policy.A higher repo rate can reduce money supply in the economy and thus help arrest price rise.Cut in repo rate: When RBI cuts repo rate, banks need to pay less interest on their borrowings from RBI.It is the rate at which the central bank (Reserve Bank of India) lends money to commercial banks in the event of any shortfall of funds.Higher interest rates in an economy tend to draw foreign investment, increasing the demand for and value of the home currency.A large current account deficit tends to put downward pressure on a currency.This is because more currency is leaving the country to buy imports than is coming in to buy exports.On the other hand, higher interest rates stem money circulation in the economy, leaving more money in the hands of RBI to manage the currency demand-supply situation.Also, the currency value drops, it tends to drive up inflation, as imported goods become costlier.