Rupee continues to depreciate and there is no sign of a significant rise in the near future. The Indian currency ended at around 79.30 per US dollar on Wednesday, not far from its all-time weak close at 79.37 in the previous session.
So why is the rupee falling?
The value of the Indian Rupee against the US Dollar works on the basis of demand and supply. When the demand for dollar is high, the value of rupee decreases and vice versa.
Indian currency has been depreciating since the beginning of this year, especially due to supply chain impacts due to Russo-Ukraine war, global economic challenges due to covid pandemic, inflation, high crude oil prices, etc.
If a country like India imports more than it exports, the demand for the dollar will exceed the supply and the domestic currency will devalue against the dollar.
Experts say that the rupee’s fall these days is mainly due to higher crude oil prices, a stronger dollar overseas and foreign capital outflow.
There has been huge foreign fund outflow from the domestic markets as foreign institutional investors (FIIs) have sold shares worth over $30 billion this year. This is well ahead of the $11.8 billion sell-off seen during the 2008 global financial crisis.
As money moves out of India, the rupee-dollar exchange rate gets affected, leading to devaluation of the rupee.
Such depreciation puts significant pressure on the already high import prices of raw materials and raw materials. This in turn leads to higher import inflation and cost of production apart from higher retail inflation.
The US Federal Reserve recently raised interest rates, and the return on dollar assets has increased compared to emerging markets such as India. There are also reports of a potentially more aggressive rate hike by the US Fed and further damage to the rupee.
So, in a nutshell, a backdrop of hot inflation, the COVID crisis, monetary tightening by major central banks, and supply chain disruptions due to the Russo-Ukraine war have slowed down global economic activity, leading to a sharp depreciation of the rupee against the dollar. Is.
Then what are the measures to stop this worrying depreciation of the rupee?
The government took some steps last week, announcing a hike in customs duty on gold and increased taxes on exports of petrol, diesel as well as ATF, which is expected to control foreign trade to check the depreciation of the rupee. , Import tax on gold has also been increased from 7.5 per cent to 12.5 per cent.
Reserve Bank of India Dollar selling in spot, forward and other derivatives markets is expected to support the currency. It is also likely to raise policy rates further as part of a process that is expected to attract foreign investors to debt assets.
But will that be enough?
“Given that the new global energy order implies the pain of an expanding oil market, India will have to respond even more strongly in the interim with an increase in exports and a decrease in imports. Otherwise, the RBI currency buffers in the years to come. The recurrence of a fall to 15% of GDP (a recipe for external instability, as seen during the ‘Taper Tantrum’ of 2013) cannot be ruled out. Thus, the INR has been gradually eroded over time. Allowing dilution is the right strategy, giving the CAD room for correction. Thus, we believe the RBI may eventually adjust the exchange rate to the new realities, albeit systematically, through policy response actions. It acts as a natural macro stabilizer for equities,” said a research note by Emkay Global Financial Services.
So although there may not be an easy road, experts agree that India should move strategically towards controlling imports and increasing exports.
The government may promote the use of indigenous goods more aggressively in future to cut imports and strengthen the rupee.
It is also possible to put more emphasis on e-vehicles to reduce dependence on crude oil imports.
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