Bottomed out?

Ultimately, the value of Indian Rupee crossed the USD 80 mark on Tuesday — hitting the lowest level ever. The USD 80 mark is perceived by many as merely a psychological threshold but the continuous fall of rupee will certainly have a tangible impact on the lives of common masses as well. Both the value of the rupee and the inflationary pressure are expected to get worse going forward. The message from the Reserve Bank of India (RBI) is the one that negates the need for panic. Their argument basically is that inflationary pressure is largely of imported nature on which the government has little control, and their motive appears to keep the investors' confidence intact despite the falling value of rupee. A close look at the factors fuelling rupee decline may provide a basic understanding of the malaise, and also where to look for the remedies. The value of a currency primarily depends upon the demand-supply factor. The Indian Rupee's demand-supply outlook can be understood in both short-term and long-term contributing factors. One of the short-term factors behind the fall of the rupee is the rapid capital outflow from the domestic market. Since early this year, foreign investors have been pulling away from the Indian market — a trend that was exacerbated by the US Fed raising its interest rates in the wake of historically high inflation. This has triggered a return of investors from emerging markets like India to the US market with a view to making big profits. At present, India's forex reserve has dwindled below USD 600 bn — falling sharply from the peak of USD 642 billion in September last year. The dip in forex reserve is also partly attributable to RBI's decision to support Rupee by selling dollars to increase its supply in order to balance between demand and supply of both currencies. Another major factor is the unabated rise in international crude oil prices. It is estimated that three-fourths of India's overall inflationary pressure is in the form of imported inflation. The high price of crude oil is affecting the prices of domestic commodities on account of increased transportation cost. International crude oil price, in turn, is incumbent significantly upon Russia-Ukraine war and resulting global constraints. Apart from these major triggers, India's Central bank faces a longstanding issue of minting more money than the Central banks of the US and some other countries do. This directly contributes to increased supply of currency, and hence its decline. Furthermore, thanks to the massive capital outflows and RBI's selling of dollars in the open market, India's current account deficit is also dipping — restricting its ability to balance between imports and exports. When a country is more efficient in high-value exports, it attracts more foreign currencies, including dollars. Availability of more dollars moderates its demand and allows the rupee to gain strength. Conversely, when a country is heavily dependent on imports, the comparative value of its currency declines. Notably, India has marginal trade surpluses with some smaller economies in the Indian subcontinent and countries like the Netherlands. It also has a trade surplus with the United States. On the other hand, it has a large trade deficit with China and Russia apart from many of the Middle East nations. While India needs to fix the issue of falling value of rupee in the long run, presently it appears to have very little under its control. It may be noted that the International Monetary Fund (IMF) has predicted the value of rupee to go beyond 94 against the US dollar by the fiscal year 2029. This calls for a long-term approach towards boosting exports and curtailing import-dependency; increasing domestic production; adopting a rational approach towards money minting etc. However, for the time being, the RBI is doing the best it could do to "smoothen" the trajectory of falling rupee before it reaches an organic level. The real challenge ahead for the government is to keep investors' confidence intact, and ensure that marginalised sections of the population are least affected by the negative developments.