The free fall of the rupee
- Indian rupee hit an all-time low at 79.05 against U.S. dollar and will weaken further
- IMF expects rupee to weaken past 94 rupees to dollar mark by FY29.
What is happening with the rupee?
- Indian rupee is witnessing a steady decline this year against U.S. dollar.
- India’s forex reserves have dropped below $600 billion.
- Reason:
- Due to steps taken by RBI to support rupee.
- Fall in dollar value of assets held as reserves by RBI.
Policy of RBI
- It has tried to smoothen fall in exchange value.
- Aim: allow rupee to find its natural value in market without volatility or causing panic among investors.
- State-run banks are instructed to sell dollars to support rupees.
- By selling dollars in open market in exchange for rupees, RBI can improve demand for rupees and cushion its fall.
What determines the rupee's value?
- Value of any currency is determined by its demand and supply.
- When supply increases, its value drops.
- When demand increases, its value rises.
- Central banks determine the supply of currencies.
- Demand depends on the amount of goods and services produced in the economy.
- In forex market:
- Supply is determined by demand for imports and foreign assets.
- Demand depends on foreign demand for Indian exports and other domestic assets.
Reasons for loss in value of Rupee
- Rising benchmark interest rate. by U.S. Federal Reserve:
- Investors seeking higher returns are pulling capital away from emerging markets such as India putting pressure on their currencies.
- High Current account deficit:
- Expected to hit 10-year high of 3.3% of GDP in current financial year.
- India’s import demand amid rising global oil prices will negatively affect rupee.
- Higher domestic price inflation:
- RBI has been creating rupees at a faster rate than U.S. Federal Reserve has been creating dollars.
Way ahead
- Rupee will continue to depreciate against dollar because of differences in long-run inflation between India and U.S.
- As U.S. Federal Reserve raises rates to tackle high inflation, emerging markets will raise their own interest rates to avoid disruptive capital outflows and to protect their currencies.
- As interest rates rise across the globe, threat of a global recession also rises as economies readjust to tighter monetary conditions.