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

The rupee recently fell to an all-time low against the US dollar, breaching the 84 mark for the first time in history. On October 14, the currency hit 84.0750 per US dollar, raising concerns among financial analysts and policymakers. For over two months, the rupee had been hovering near this critical threshold, with the Reserve Bank of India ( RBI ) reportedly intervening to keep it afloat. However, a combination of global and domestic factors ultimately pushed the rupee past the psychological barrier.What’s driving the Rupee ’s decline?Several factors have contributed to the rupee's recent slide, with three major drivers standing out:Rising crude oil pricesIndia, being one of the 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, leading to a larger trade deficit. This situation weakens the rupee because more US dollars are required to cover the same volume of imports. Higher crude prices not only increase import costs but also impact inflation, further straining the local currency.FPI outflowsThe 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 the Chinese government earlier in the month. These large-scale FPI outflows have added downward pressure on the rupee, causing further depreciation.Increased demand for the US DollarThe demand for the US dollar has surged, with foreign banks increasing dollar purchases, possibly on behalf of their clients. The robust US dollar, buoyed by strong economic data and ongoing global uncertainties, has created a challenging environment for the rupee. As the dollar continues to strengthen amid geopolitical risks and economic concerns, the rupee has struggled to maintain stability.The role of the Reserve Bank of IndiaThe Reserve Bank of India has actively intervened in the forex market to support the rupee and mitigate extreme volatility. Despite these efforts, the central bank has not been able to prevent the currency from breaking the critical 84 level. While RBI ’s interventions have helped slow the pace of depreciation, the impact of external forces, such as global crude prices and FPI behavior, have weighed on the rupee.Implications for the Indian economyThe rupee’s depreciation has significant implications for the Indian economy, particularly in terms of inflation and the trade 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 leads 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 ahead for the Rupee ?The near-term outlook for the Indian rupee remains uncertain, with continued weakness projected if current conditions persist. Several key factors will influence its future trajectory:The direction of global oil prices will play a crucial role. If prices remain elevated, the rupee could face further pressure due to higher import costs and a widening trade deficit. Meanwhile, actions of foreign investors, particularly FPIs, will impact the currency and a sustained exodus from Indian equities or debt could exacerbate the rupee's decline. And, the central bank's approach to managing the currency's depreciation will be a significant determinant of the rupee's path. While the RBI has taken measures to cushion the fall, its ability to do so amid global economic uncertainties remains in question.Analysts suggest that if the current trends continue, the rupee could test new lows in the coming months. However, a proactive approach by policymakers to manage external vulnerabilities and stabilise the currency could mitigate some of the risks.In this period of uncertainty, businesses and investors should prepare for continued volatility in the forex market, while staying attuned to policy responses and economic developments that could influence the rupee’s trajectory.

Advertisement

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

Rising oil prices strain India’s economy by increasing import costs, widening the trade deficit, weakening the Rupee, and driving inflation.

Advertisement