Question

What are the causes for currency depreciation?

Answer 1

A Currency weakens (depreciates) mainly due to :

1. Some Global events that have economic implications. China, USA, OPEC countries could cause such events recently. Global slowdown, stockmarket crashes, or a war can also trigger depreciation.

2. Current Account Deficit (CAD) or the trade gap between imports and exports. This is related to the foreign currency balance with the government.

The more India imports and the more India spends its dollars, the more will be the CAD. More exports means less deficit.

So increasing productivity + exports and decreasing imports will strengthen currency. Best examples are Japan and Germany who increased productivity and have substantial foreign currency reserves.

India imports much more than it exports. This is the big problem that the country faces .

Answer 2

Explanation:

Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability or risk aversion among investors. Countries with weak economic fundamentals such as chronic current account deficits and high rates of inflation generally have depreciating currencies.