This week, the Indian rupee fell to an all-time low against the dollar, falling below the 79 rupees to a dollar threshold and reaching a low of 79.05 on Wednesday. Many analysts predict that the rupee will continue to lose value over the upcoming months and pass the 80 rupees to the dollar threshold.
In fact, the International Monetary Fund (IMF) anticipates that by FY29, the rupee will lose value past the threshold of 94 rupees to a dollar.
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Why is the Rupee falling?
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The value of the Indian rupee in relation to the US dollar is determined by supply and demand. The value of the Indian rupee decreases when demand for US dollars increases and vice versa. The demand for the dollar will be larger than the supply if a nation imports more than it exports, which will cause the indigenous currency, such as the rupee in India, to lose value in relation to the dollar.
These days, the strong dollar abroad, the high price of crude oil, and international capital outflows are the key causes of the rupee’s decline.Since the beginning of the year, the rupee has been losing value, particularly following supply chain disruptions due to the Russia-Ukraine war, global economic difficulties, inflation, and rising crude oil prices, among other problems.
The foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year, surpassing the $11.8 billion sell-off recorded during the Global Financial Crisis of 2008. In addition, there have been significant outflows of foreign funds from domestic markets.
What does an economy’s weak rupee mean?
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When the rupee’s value decreases, the dollar becomes more dear and imports become more expensive. Consequently, a falling rupee causes imported inflation. India’s trade deficit, which typically arises when imports exceed exports, is further disrupted by the weakening rupee. Growing trade deficits also result in growing current account deficits for the nation. Foreign investors generally leave when the currency experiences wild volatility.
The rupee’s decline causes the country’s balance of payments deficit to grow. The net inflow of dollars into the economy from current account and capital account transactions is the state of a nation’s balance of payments. As a result, it becomes a key macroeconomic factor that affects the local currency.
Given that India imports more than 80% of its crude oil, which is the largest import of the nation, inflation will be the most affected by the declining rupee. Since Russia invaded Ukraine in February of this year, the price of crude has consistently remained at or over $100 per barrel. Inflationary pressures in the economy will only increase as a result of high oil costs and a declining rupee.
RBI’s response
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The Reserve Bank of India (RBI) is waging a multifaceted battle to halt the rupee’s slide into new lows. According to reports, the central bank sold dollars on Wednesday for between 78.97 and 78.98 per US dollar and significantly increased its foreign exchange reserves to protect the rupee from a rapid devaluation, as cited by Outlook. The total foreign exchange reserves have decreased by $40.94 billion since February 25.
On June 24, RBI deputy governor Michael Patra stated that the institution will continue to support the rupee’s stability and would not permit any abrupt fall of the rupee against the dollar, as cited by Moneycontrol.
As the value of the rupee continues to fall, there is a potential that the central bank would interfere once more. Forex market experts said the RBI will continue to defend the rupee to help importers and not allow a runaway depreciation in the rupee.
Quoting a report by Moneycontrol, according to Madhavi Arora, head economist at Emkay Global, the RBI should finally permit the exchange rate to adapt to changing circumstances, however orderly, allowing it to serve as a natural macro stabiliser to the function of the policy reaction.
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