Rupee Hits an All-Time Low of 86 Against the US Dollar

Syllabus: GS3/Economy

Context

• The Indian rupee has recently crossed the 86 mark against the US dollar, marking an all-time low.

About

• Currency depreciation refers to the decline in the value of one country’s currency relative to another currency. 
• The Indian rupee has seen a periodic depreciation against major currencies, particularly the US dollar. 

Reasons for depreciation of rupee

• Rising Crude Oil Prices: The surge in global crude oil prices has led to increased import bills for India, thereby exerting downward pressure on the rupee.
• Outflows by Foreign Portfolio Investors (FPIs): FPIs have shifted their investments from Indian markets due to global economic uncertainties, reducing the supply of foreign currency in India, contributing to the rupee’s fall.
• Increased Demand for US Dollars: There has been a heightened demand for the US dollar from foreign banks, exacerbating the rupee’s depreciation.
• Weak Domestic Markets: The overall weakness in domestic equity and bond markets has further contributed to the rupee’s decline, making it less attractive to foreign investors.

Impact of Rupee depreciation

• Exports and Imports: While a weaker rupee can boost exports by making Indian goods cheaper for foreign buyers, it also raises the cost of imports, particularly essential commodities like oil and machinery. 
• Foreign Debt Servicing: For companies and the government with significant foreign currency debt, a depreciating rupee increases the cost of servicing the debt, straining their financial positions.
• Inflation: The increase in import costs lead to higher consumer prices, impacting purchasing power and potentially leading to overall inflation in the economy.
• Investor Sentiment: A declining currency affects investor confidence, resulting in reduced foreign direct investment (FDI) and further capital outflows.

How does the RBI maintain the rupee value?

• Intervention in Forex Markets: The RBI intervenes in the foreign exchange market by buying or selling dollars to stabilize the rupee’s value. This helps mitigate excessive volatility.
• Monetary Policy adjustments: By adjusting interest rates, the RBI influences capital flows. Higher interest rates can attract foreign investment, supporting the rupee’s value.
• Forex  reserve management: The RBI maintains a buffer of foreign exchange reserves that can be utilized during times of currency volatility. 

Way Ahead

• Long-term investment: A stable rupee requires steady capital inflows. India should focus on attracting long-term foreign direct investment (FDI) rather than volatile foreign portfolio investments (FPI).
• Maximizing Remittances: India is one of the largest recipients of remittances globally. Policies that make it easier for Non-Resident Indians (NRIs) to remit money home, can increase foreign currency inflows, stabilizing the rupee.
• Export Competitiveness: The focus should be on enhancing the competitiveness of Indian exports by investing in sectors like technology, pharmaceuticals, textiles, and manufacturing.

Sources: IE