A concerning decline
The Indian rupee hit a record low, surpassing the value of 86 against the US dollar on Monday, and has been witnessing a continuous decline for quite a long time. The recent drop appears to be part of a broader trend that is influenced by global and domestic factors alike. It must be noted here that the macroeconomic credentials of the US economy are going through a sharp rise and global crude oil prices are increasing. Against this backdrop, the withdrawal of foreign investments from Indian markets has further compounded the problem. The US dollar has come back on a strong footing. Moreover, the headline Non-farm Payroll (NFP) print of 2,56,000 has far exceeded the expectations. At the same time, the US unemployment rate dropped marginally from 4.2 per cent. This has led to speculation that the Federal Reserve will reduce interest rates more cautiously, making US assets more attractive to investors. As a result, there has been a significant outflow of funds from emerging markets like India. Further adding to the rupee’s troubles is the sharp increase in crude oil prices. Since India imports most of its oil, higher prices increase the country’s import bill and put pressure on the rupee. Foreign investors have also been selling off Indian equities, which will weaken the INR.
The Reserve Bank of India (RBI), which usually intervenes to prevent the rupee from falling too much, seems to be taking a more divergent approach this time around. Certain experts believe that allowing the rupee to weaken slightly might be a better strategy. Intervening too much can lead to other problems, such as tighter banking liquidity and higher short-term interest rates. Some believe that by stepping back, the RBI can save its foreign exchange reserves for more critical situations.
In the short term, a weaker rupee has both positive and negative effects on the economy. On the downside, it makes imports like oil, edible oils, and fertilisers more expensive, which raises inflation and increases costs for consumers. For example, higher oil prices lead to higher transportation costs, making food and other goods more expensive. This eventually worsens India’s trade deficit and slows down economic growth. On the other hand, export-oriented industries such as IT, textiles, and pharmaceuticals benefit from a weaker rupee because their products become cheaper. However, industries that rely on imports, like electronics and chemicals, face higher costs. Companies with loans in foreign currencies also have to pay more.
It seems that the rupee’s value will likely remain under pressure in the near future. Global factors, especially US monetary policy and geopolitical tensions, are less likely to witness a reversal. The Federal Reserve’s cautious approach to interest rate cuts and ongoing issues like the Russia-Ukraine war and disruptions in Middle Eastern trade routes are keeping oil prices high. These factors make it difficult for the rupee to recover quickly. The government and RBI have a tough task ahead. Encouraging foreign investments and reducing dependency on imports, particularly in the energy sector, could help ease the pressure. Keeping inflation under control is also essential to maintain economic stability. In the long run, the rupee’s recent free fall is concerning. By carefully managing the situation and implementing structural reforms, India can conquer these challenges and work toward a more stable and resilient economy for the people.
