The rupee breached the 84-mark to hit an all-time low against the dollar last week. Amid geopolitical turmoil, it is likely to fall even further in the coming weeks. Mint looks at what is causing the rupee to weaken and its impact on the domestic economy.
By how much has the rupee fallen?
The Indian currency breached the 84-mark against the greenback last Friday and fell again when the markets opened this week on Monday to close at an all-time low of 84.07. It has remained in a narrow band around the same figure ever since. This year the currency has been largely weak against the dollar, staying at well over 82. On 11 March, it was at its strongest at 82.68 to the dollar. Since April 2022, the currency has depreciated sharply by over 9% which is more than the long-term trend of 30% depreciation over a decade at an average 3% fall every year.
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Will it fall even further?
Volatility in the Indian stock market is likely to impact the local currency in the short term. After months of inflows from foreign institutional investors (FIIs) of nearly $25 billion this year, the market is considered by some as overvalued. In the current month alone, FIIs have booked profits and pulled back nearly $8 billion from the markets. This has weakened demand for the rupee and strengthened the dollar. Experts say more sell-offs could see the currency fall further to around 84.20 but the country’s $700-billion forex reserve could come in handy for the RBI to intervene and stem the slide.
What are the reasons for the fall of the rupee?
The rupee’s valuation against the dollar is based on the attractiveness of India as an investment destination. Geopolitical instability has a major impact on the decisions of investors. The conflict between Israel, Palestinians, Iran and its allies on top of the Russia-Ukraine war, could potentially disrupt global supply chain and lead to rise in oil prices.
How does it impact everybody?
A weaker rupee makes imports expensive while it benefits exporters. Since India is a net importer of goods and services—it has a current account deficit of $9.7 billion in the first quarter of 2024-25—a fall in the rupee has an adverse impact on a host of products from electronics and machinery to plastics and chemicals. It also makes foreign education and tourism expensive. A more direct impact is on oil prices as India is dependent on crude imports for over 85% of its annual requirement.
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Is the news for exporters all good?
Not really. Since global transaction are carried out in dollars, a weaker rupee makes exports attractive as exporters get more local currency for the dollars they earn from selling goods abroad. But a fragile global economy means there is less demand for goods overseas, which is reflected in India’s muted merchandise export growth of just 1.1% in April-August. While this was somewhat offset by the 11% growth in services exports, imports are growing faster. All in all, a further weakening of the rupee is bad news.
