This week, the Indian rupee fell to an all-time low against the dollar, falling below 79 rupees at a dollar threshold and hitting a low of 79.05 on Wednesday. Many analysts predict that the rupee will continue to lose value over the next few months and will break through 80 rupees at the dollar threshold.
In fact, the International Monetary Fund (IMF) predicts that by FY29, the rupee will lose value beyond the threshold of 94 rupees to the dollar.
Why is the rupee falling?
The value of the Indian rupee against the US dollar is determined by supply and demand. The value of the Indian rupee decreases when the demand for US dollars increases and vice versa. The demand for the dollar will exceed the supply if a nation imports more than it exports, causing the local currency, such as the rupee in India, to lose value against the dollar.
Today, the strength of the dollar abroad, the high price of crude oil and international capital outflows are the main causes of the decline of the rupee. Since the beginning of the year, the rupee has been losing value, particularly following supply chain disruptions due to the Russian-Ukrainian war, global economic difficulties, inflation and rising oil prices. crude oil, among other issues.
Foreign institutional investors (IFIs) have sold shares worth $28.4 billion so far this year, surpassing the sale of $11.8 billion recorded during the 2008 global financial crisis. In addition, there have been significant outflows of foreign funds from domestic markets.
What does a weak rupee mean to an economy?
When the value of the rupee decreases, the dollar becomes more expensive and imports become more expensive. Therefore, a falling rupee causes imported inflation. India’s trade deficit, which typically occurs when imports exceed exports, is further disrupted by the weakening rupee. Growing trade deficits also lead to growing current account deficits for the nation. Foreign investors usually leave when the currency experiences high volatility.
The fall in the rupee leads to a worsening of the country’s balance of payments deficit. 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 affecting the local currency.
Since India imports more than 80% of its crude oil, which is the country’s largest import, inflation will be the most affected by the falling rupee. Since Russia invaded Ukraine in February this year, the price of crude has consistently remained at or above $100 a barrel. Inflationary pressures in the economy will only increase due to high oil prices and falling rupiah.
The Reserve Bank of India (RBI) is waging a multi-faceted battle to halt the rupiah’s slide to new lows. According to reports, the central bank sold dollars on Wednesday 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 quoted by Outlook. Total foreign exchange reserves have decreased by $40.94 billion since February 25.
On June 24, RBI Deputy Governor Michael Patra said the institution would continue to support the stability of the rupee and would not allow any sharp fall in the rupee against the dollar, as quoted by Moneycontrol.
As the value of the rupee continues to fall, it is possible that the central bank will intervene once again. Forex market experts have said that the RBI will continue to defend the rupee to help importers and not allow runaway depreciation of the rupee.
Citing a Moneycontrol report, according to Madhavi Arora, Chief Economist at Emkay Global, the RBI should finally allow the exchange rate to adapt to changing circumstances, however orderly, allowing it to serve as a macro stabilizer. natural to the function of political reaction. .
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