Explainer: Rupee’s fall and its impact

Fluctuations in currency often serve as early warning indicators. There has been a significant pressure on the Indian rupee in recent weeks mainly driven by global volatility, including the increase in oil prices amid the conflict in West Asia, and a surging demand for the US dollar.The rupee hit a historic low of 95.22 in intra-day trade against the US dollar on March 30. Intervention by the Reserve Bank of India (RBI) has sparked a recovery to the 93.14 level, but the currency remains sensitive to external shocks.Dr VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, says the fundamental reasons for the rupee’s depreciation are a spike in crude oil prices and the consequent widening of the trade deficit, a rising dollar and sustained FPI (Foreign Portfolio Investors) selling.“If the rupee is to turn stable, these factors have to reverse. If the war ends soon and crude prices decline sharply, the rupee can stabilise. However, sustained FPI selling continues to be a concern,” he adds.How economy takes a hitMassive selling by foreign investors: In recent weeks, foreign institutional investors (FIIs) have been withdrawing their funds from Indian stocks. In fact, FIIs have sold equities worth Rs 1.04 lakh crore till March.Inflation pressure: The domestic price of imported items increases when the currency depreciates. This pass-through to pricing has the potential to increase inflation in India, where a significant portion of energy and essential industrial inputs are imported.Increased fuel and commodity prices can have a cascading effect on consumer products, manufacturing, and transportation, ultimately impacting household cost-of-living indices.Changing trade dynamics: Theoretically, a depreciating rupee might lower the cost of Indian exports and increase their competitiveness in global markets. Increased pricing competitiveness overseas may help industries, including textiles, chemicals, autos, and IT services.Reasons behind the slideIncreased oil prices: More than 80 per cent of India’s crude oil requirements are met by imports. The country needs more dollars to pay for imports when the price of oil rises significantly globally. The rupee weakens as a result of the increased demand for the US dollar. In addition, the escalating crisis in West Asia has caused oil prices to soar around USD 120 per barrel.Strong American currency: Global investors favour safer investments during turbulent times. The US dollar is regarded as the reserve currency of the world. Therefore, money flows into the dollar make it more strong as the risk increases globally.Geopolitical uncertainty: Any uncertainty in the geopolitical landscape, especially in the region which is considered the oil-producing epicentre, is likely to impact the currency. It eventually leads to a rise in oil prices and capital outflows.Steepest single-day gainOn December 3 last year, the rupee slipped past the 90 mark against the US dollar. It was attributed to sustained equity outflows and the uncertainty over the proposed India-US trade pact. The slide from the 85 level to the 90 mark took just 231 days.On April 2, the rupee logged one of its steepest single-day gains in many years and settled 156 paise higher at 93.14 (provisional) against the US dollar. This, after the RBI stepped in with a slew of measures to restrict banks from onshore forward markets.“The rupee significantly appreciated to around Rs 92.90 level by 1 pm on Thursday. This appreciation was the consequence of a short-squeeze triggered by the RBI’s directive to banks capping the deliverable rupee position in the onshore market to USD 100 million a day,” Dr Vijayakumar says.What lies aheadRiyank Arora, Associate Vice President – HNI & Derivatives, Hedged.in, says the recent fall in the rupee is largely driven by external factors. “The impact on the economy is two-fold. A weaker rupee raises the cost of imports, especially fuel, which feeds into inflation through transportation and production costs. This can reduce consumer spending and corporate profitability. Additionally, rising oil prices tend to widen the current account deficit,” he adds.In terms of preparedness, he outlines that India is in a relatively stronger position compared to past episodes. RBI has adequate forex reserves to manage excessive volatility, while the government has policy flexibility to adjust fuel taxes or deploy targeted measures to contain inflation.Going forward, the rupee’s direction will depend largely on oil price trends and geopolitical developments, Arora points out.

Explainer: Rupee’s fall and its impact

Its direction will depend largely on oil price trends and geopolitical developments

Aditya Rangroo

Explainer: Rupee’s fall and its impact

Its direction will depend largely on oil price trends and geopolitical developments

Aditya Rangroo

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