Summary:
The Indian Rupee has weakened past 84 per US dollar for the first time in history, marking a significant milestone. This depreciation is driven by a confluence of factors, including sustained selling of domestic equities by foreign portfolio investors (FPIs), escalating concerns about rising crude oil prices, and a strengthening US dollar. While the Reserve Bank of India (RBI) has intervened to curb volatility, the rupee’s slide reflects underlying economic pressures and global uncertainties.
Key Insights:
Impact on imports and inflation: A weaker rupee makes imports more expensive, potentially fueling inflationary pressures. This could complicate the RBI’s efforts to manage inflation and may necessitate further policy adjustments.
Multiple factors contribute to the decline: The rupee’s fall is not attributed to a single cause, but rather a combination of factors. Heavy selling of Indian equities by FPIs is exerting downward pressure, while surging crude oil prices are increasing India’s import bill and widening the current account deficit. Additionally, the US dollar’s strength against major currencies is further exacerbating the rupee’s weakness.
RBI intervention: The RBI has been actively utilizing its foreign exchange reserves to stabilize the rupee and mitigate excessive volatility. However, despite these efforts, the rupee has breached the psychologically significant 84 mark.
Investment Implications:
Impact on foreign investments: The rupee’s weakness could make Indian assets less attractive to foreign investors, potentially leading to further FPI outflows.
Increased import costs: Importers, especially in sectors reliant on crude oil and other dollar-denominated commodities, will face higher costs. This could impact their profitability and potentially lead to price increases for consumers.
Export competitiveness: A weaker rupee can make Indian exports more competitive in the global market. Export-oriented sectors may benefit from this depreciation.
Sources:
Rupee weakens below 84 against US dollar amid FPI selloff, costlier oil – Business Standard
