WATCH | Why did the Rupee hit a record low against the US Dollar?

rupee recently fell to an all-time low against US dollar, breaching 84 mark for first time in history. On October 14, currency hit 84.0750 per US dollar, raising concerns among financial analysts and policymakers. For over two months, rupee h been hovering near this critical threshold, with Reserve Bank of India ( RBI ) reportedly intervening to keep it afloat. However, a combination of global and domestic factors ultimately pushed rupee past psychological barrier.

What’s driving Rupee ’s decline?

Several factors have contributed to rupee's recent slide, with three major drivers standing out:

Rising crude oil prices

India, being one of world's largest importers of crude oil, faces significant economic pressure when global oil prices surge. As oil prices rise, India's import bill rises, leing to a larger tre deficit. This situation weakens rupee because more US dollars are required to cover same volume of imports. Higher crude prices not only increase import costs but also impact inflation, furr straining local currency.

FPI outflows

Indian financial markets have witnessed substantial outflows from foreign investors. In October alone, FPIs sold nearly Rs 59,000 crores worth of Indian stocks, as many investors shifted focus toward Chinese markets due to stimulus measures announced by Chinese government earlier in month. se large-scale FPI outflows have ded downward pressure on rupee, causing furr depreciation.

Increased demand for US Dollar

demand for US dollar has surged, with foreign banks increasing dollar purchases, possibly on behalf of ir clients. robust US dollar, buoyed by strong economic data and ongoing global uncertainties, has created a challenging environment for rupee. As dollar continues to strengn amid geopolitical risks and economic concerns, rupee has struggled to maintain stability.

role of Reserve Bank of India

Reserve Bank of India has actively intervened in forex market to support rupee and mitigate extreme volatility. Despite se efforts, central bank has not been able to prevent currency from breaking critical 84 level. While RBI ’s interventions have helped slow pace of depreciation, impact of external forces, such as global crude prices and FPI behavior, have weighed on rupee.

Implications for Indian economy

rupee’s depreciation has significant implications for Indian economy, particularly in terms of inflation and tre deficit. A weaker rupee makes imports more expensive, potentially driving up inflation rates, especially for essential commodities such as oil. This could also impact consumer prices and corporate profitability, as companies face higher import costs that may be passed on to consumers.

Moreover, a depreciating currency often les to capital outflows, as investors seek better returns in more stable currencies. If this trend continues, it could hinder foreign investment in Indian markets, affecting economic growth prospects.

What lies ahe for Rupee ?

near-term outlook for Indian rupee remains uncertain, with continued weakness projected if current conditions persist. Several key factors will influence its future trajectory:

direction of global oil prices will play a crucial role. If prices remain elevated, rupee could face furr pressure due to higher import costs and a widening tre deficit. Meanwhile, actions of foreign investors, particularly FPIs, will impact currency and a sustained exodus from Indian equities or debt could exacerbate rupee's decline. And, central bank's approach to managing currency's depreciation will be a significant determinant of rupee's path. While RBI has taken measures to cushion fall, its ability to do so amid global economic uncertainties remains in question.
Analysts suggest that if current trends continue, rupee could test new lows in coming months. However, a proactive approach by policymakers to manage external vulnerabilities and stabilise currency could mitigate some of risks.

In this period of uncertainty, businesses and investors should prepare for continued volatility in forex market, while staying attuned to policy responses and economic developments that could influence rupee’s trajectory.