Why Is The Rupee Crashing? Experts Pitch In About Possible Reasons

Indian Rupee breached the 86 mark and hit a fresh low on the strong Dollar and weak global markets.

The Rupee Landslide

The Indian currency has plunged more than Re 1 in the past two weeks from the closing level of 85.52 on December 30. It had breached the 85-per-dollar mark for the first time on December 19, 2024.

Last week, the local currency had declined 18 paise to settle at 86.04 against the US dollar on Friday, a day after registering a marginal gain of 5 paise. In the preceding back-to-back sessions on Tuesday and Wednesday, it had plunged 6 paise and 17 paise, respectively.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.37 per cent down at 109.41.

In the domestic equity market, the 30-share BSE Sensex was trading 364.90 points, or 0.48 per cent, higher at 76,694.91 points, while the Nifty was up 123.65  points, or 0.54 per cent, at 23,209.60 points.

Why Is The Rupee Crashing?

According to the government data released on Monday, January 13, 2025, retail inflation declined to a four-month low of 5.22 per cent in December, 2024, mainly on account of easing of prices in the food basket, giving headroom to the Reserve Bank to reduce the key interest rate in upcoming monetary policy reviews.

The inflation based on the Consumer Price Index (CPI) eased for the second month in a row after it breached the Reserve Bank of India's ( RBI 's) upper tolerance level of 6 per cent in October.

As inflation rises, every rupee will buy a lower quantity of goods.

One speculative reason is the rampant sale of Foreign Institutional Investors (FII). The FIIs continue to remain net sellers, and they offloaded Rs 2,254.68 crore in the capital markets on a net basis on Friday, January 10, 2025,  according to exchange data. On Monday this amount increased to Rs 4,892.84 crore. Massive outflow of currency from the market dampens investor sentiment, thus having a cascading impact on the Indian Rupee.

Another possible reason is the rise in Brent crude prices. Brent crude, the global oil benchmark, surged 1.44 per cent to USD 80.91 per barrel in futures trade.

The US Dollar gained on better than expected US non-farm payrolls report, raising the odds of a no-rate hike by the US Federal Reserve in January. Michigan's 1-year inflation expectations too were higher than expected at 3.3 per cent in January vs 2.8 per cent in December.

Why Is The Rupee Crashing? Experts Chip In

Appended is the view on the Rupee movement, Anuj Choudhary Research Analyst at Mirae Asset Sharekhan, said, “We expect the Rupee to remain weak on strong Dollar and weak tone in the domestic markets.”

“A record low for the rupee, down about 0 .5  per cent percent during the day and 3 .64 per cent in FY25.” said Mahesh M. Ojha, AVP Research & Business Development, Hensex Securities Pvt. Ltd.

There are a few factors why the rupee is reacting the way it is. Firstly, the US macroeconomic data has come out to be stronger than expected. Jobless claims have come down, unemployment levels have been falling sharply, and on top of that, the chances of a rate cut by the US Federal Reserve have been falling.

“The expectations are now that maybe we might witness Dollar and US Bond yield to rise sharply. Due to the strengthening of the dollar; almost all Asian currencies are dropping against the dollar.” Ojha added. Meanwhile, RBI however focuses on staying away from excessive intervention in the currency market.

Also, India's forex reserves currently are at $634.58 bn as of January 3, 2025, down by $11.80 bn in FY25. “The Fall in reserves may open the rupee to speculative attack. However, we are uncertain about our decision till Trump joins.” Ojha said.

Another interesting reason is the depleting forex reserve. “After covid dollar was getting weak, since then RBI governor started selling dollar to stabilise exchange rate.” said Avik Sinha, Associate Professor, Xi'an Jiaotong-Liverpool University, China.  

Not only has the Indian rupee get weaker , but China, Thialand, etc Asain countries have also seen their currency value deplete. It is not that the Rupee and other currencies have gotten weaker, the Dollar has gotten stronger.

“Trump brought MAGA sentiment, and Dollar became strong.”, Sinha said. The USA has reduced tax rates and interest on loans which has strengthened the Dollar.

Another reason is India's massive dependencies on import like crude oil and electronics. “The way to overcome this is by focusing seriously on Make In India.”, said Sinha.

Sounding a word of caution for traders, Choudhary said, “Traders may remain cautious ahead of inflation data from India and the US this week. USDINR spot price is expected to trade in a range of Rs 86.25 to Rs 86.80.”