Since a few days ago, the Indian rupee has been falling against the US dollar, reaching a record low of 79.03 on Wednesday. Analysts are debating whether the native currency could continue to weaken in light of the dismal fundamentals as a result of this.
Since January of this year, the rupee has decreased by roughly 6%. But on Thursday, it was able to bounce back from its all-time low, rising 13 paise to 78.90 against the dollar. Now that the country is struggling with significant inflation and the cost of basic necessities is sharply rising, things are getting worse for the average person. However, Nirmala Sitharaman, the Union Finance Minister, has asserted that the Indian rupee is substantially better positioned than other global.
Why Is Rupee Falling?
Demand and supply determine how much the Indian rupee is worth relative to the US dollar. The value of the Indian rupee decreases and vice versa when demands for the US dollar increases.
If a nation imports more than it exports, there will be a surplus of dollars rather than a shortage, which will cause the domestic currency, such as the rupee in India, to lose value in relation to the dollar.
These days, the strong dollar abroad, high crude oil prices, and outflows of foreign capital are the key causes of the rupee’s decline. The rupee has been falling since the beginning of the year, particularly following supply chain interruptions as a result of the Russia-Ukraine war, global economic difficulties, inflation, and rising crude oil prices, among other problems.
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. So far this year, the rupee has lost 5.9% of its value against the dollar.
The rupee depreciates as money leaves India and the rupee-dollar exchange rate is affected. A significant amount of pressure is put on the already high import prices of oil and raw materials as a result of this devaluation, which also increases the cost of manufacturing and import inflation in addition to retail inflation.
The return on dollar assets grew in comparison to those in emerging countries like India as the US Federal Reserve recently raised interest rates. There are rumors that the US Federal Reserve may increase interest rates more aggressively, which might hurt the Indian rupee even more.
How does a weak rupee impact you and the economy?
India pays in US dollars since the nation mostly imports goods including crude oil, metals, electronics, and other goods. Now, if the rupee is weak, it will cost more to purchase the same amount of goods. In such circumstances, the cost of production and raw materials increases, passing the expense on to customers.
On the other side, when shipments become more competitive and overseas customers have more purchasing power, a weaker home currency increases exports. However, exporters are not in favor of the currency decline in the current environment of weak global demand and ongoing volatility.
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.
How do Crude Oil Prices Affect Rupee?
India imports a significant amount of crude oil to satisfy more than 80% of its energy needs. When crude prices rise, it usually puts pressure on the rupee since India’s import costs rise as a result.
Brent crude reached a price of $110 per barrel in May; it is currently trading at $122 per barrel. If oil prices are growing, it suggests imports are rising consistently. This increases demand for the US dollar, strengthening it relative to the rupee. Since January of this year, the Indian rupee has been losing value, which reduces the purchasing power of the rupee on the global market.
Is the Rupee likely to see more declines?
Numerous analysts predict that as oil prices rise and the FII sell-off persists, the rupee will weaken much more against the dollar in the coming sessions. Analysts claim that the Indian economy’s fundamentals have gotten worse.
However, this is where RBI’s function enters the picture, and the central bank has been acting to stop the free decline. It used India’s enormous stockpile of foreign exchange reserves in May to stop the rupee from falling below Rs 77.5 against the US dollar.
Will the RBI intervene further?
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. The total foreign exchange reserves have decreased by $40.94 billion since February 25.
As the value of the rupee continues to fall, there is a potential that the central bank would interfere once more.
The central bank will not let “”jerky fluctuations”” of the rupee, according to RBI Deputy Governor Michael D. Patra, who also emphasized that the Indian currency has experienced the least recent loss.