Why in the news?
The Indian currency hit an all-time low against the U.S. currency this week weakening past the 79 rupees to a dollar mark and selling as low as 79.05 against the dollar
What is happening with the rupee?
The Indian rupee has witnessed a steady decline this year, losing over 6% against the US dollar since the start of 2022.
- India’s forex reserves:
- IFR dropped below $600 billion and fell steeply by more than $50 billion since September 2021, when forex reserves stood at an all-time high of $642 billion.
- The fall in India’s foreign exchange reserves is assumed to be primarily due to moves taken by the RBI to support the Indian rupee.
- RBI officials have noted that the fall in forex reserves is due to a fall in the dollar value of assets held as reserves by the RBI.
- For example, if a portion of the reserves are in euros and the euro depreciates against the dollar, this would cause a fall in the value of foreign exchange reserves.
- Aim of the RBI’s policy:
- RBI aims to find the natural value of the Rupee in the market without creating any panic view among the investors.
- State-run banks are usually instructed by the RBI to sell dollars in regards to offering some support to the Indian rupee.
- Therefore, by selling dollars in the open market in exchange for rupees, the RBI can improve demand for the rupee and cushion its downfall.
What is Depreciation?
- Currency depreciation is a downfall in the currency value in a buoyant exchange rate system
- Rupee depreciation means that the value of the Indian currency has decreased with respect to US Dollars.
Impact of Depreciation of Indian Rupee:
- Depreciation in rupees is both positive and negative for the Reserve Bank of India.
- A weaker rupee should apparently give a boost to India’s exports, but in a void of uncertainty and weak global demand, a fall in the external value of the rupee may not translate into higher exports.
- It poses a risk of imported inflation and might make it difficult for the central bank to maintain interest rates at a record low for longer.
- India meets more than 2/3rd of its domestic oil needs through imports.
- India is also one of the top importers of edible oils. A weaker currency will further escalate imported edible oil prices and lead to higher food inflation.
What are the Reasons for the Current Depreciation of the Indian Rupee?
- Sell-off of the Equity:
- A sell-off in the global equity markets was prompted by the rise in interest rates by the US. The Federal Reserve (central bank), the war in Europe and growth concerns in China due to the Covid-19 surge, led to the Indian currency depreciation.
- The outflow of Dollars:
- The outflow of dollars is a result of high crude prices and the correction in equity markets also caused an extreme drift of dollars.
- Tightening of Monetary Policy:
- Steps were taken by RBI to strike the monetary policy to counter and check rising inflation which has also led to depreciation.
How does the Depreciation of the Rupee Impact the Overall Economy?
- The current account deficit is fenced to widen, exhausting foreign exchange reserves and weakening the Rupee.
- With higher prices of crude oil and other essential imports, the economy is absolutely shifting towards cost-push inflation.
- Cost-push inflation (also known as wage-push inflation) occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
- Companies may not be approved to fully pass on the load of high costs to consumers, which affects government dividend earnings, raising questions about budgeted fiscal deficits.
Conclusion:
- The Indian Rupee is expected to trade at 78.82 by the end of this quarter, according to Trading Economics global macro models and analysts expectations.
- Looking forward, we estimate it to trade at 80.63 in 12 months' time.
