The Indian rupee has not only fallen in value in 2022 by more than 7% against the US dollar but is also likely to depreciate further and a US dollar may soon cost more than Rs 80. Economists and currency market experts observed this last week, a day after the US reported inflation at 9.1% for June, the highest since 1981. For some time, experts say, a dollar may cost between Rs 80 and Rs 81. There are broadly five reasons for the decline in the value of the Indian rupee. Before those are explained, the reader must note that the Indian rupee is among the better-performing currencies in the world.
Notwithstanding the downswings in the recent past, the Indian rupee has been one of the best-performing currencies and also the stable one in Asia. Sugandha Sachdeva, the vice-president of commodities and currency research at Religare Broking, says, “Being one of the stable currencies, the Indian rupee has further room for depreciation. It may even touch 81 soon.”
2. Investors choosing havens
Since the Ukraine-Russia conflict began, investors have switched to havens like the US. “Due to the dollar supremacy, the US never had to defend the dollar. The US by default was a stable market for investors. Moreover, investors tend to invest in the haven after the war,” Sankhanath Bandyopadhyay, economist, Infomerics Ratings, said.
3. Better rate of returns from America
While the Reserve Bank of India (RBI) has taken several measures recently to ensure the foreign currency inflow, it will take time to compensate for the loss India has incurred in the past few years. In this scenario, investors are getting higher returns from the bond yields in the US, compared to the rate of returns in any Indian investment. Investors are more or less avoiding the Indian market at this juncture. “In countries like the US, for deposits with a tenure of two to five years, the rate is close to 3% and more,” said Ashutosh Khajuria, ED, Federal Bank. On the other hand, the rate was low for deposits like FCNR(B) in India.
The RBI is fighting on several fronts to slow the rupee’s decline to fresh records. The central bank is said to have sold dollars at 78.97-78.98 per US dollar on Wednesday and has heavily expanded its foreign exchange reserves to shield the rupee from a runaway depreciation. Since February 25, the headline foreign exchange reserves have declined by $ 40.94 billion.
There are chances that the central bank may intervene further as the rupee sees a further decline.
Last week, RBI Deputy Governor, Michael D Patra said the central bank will not allow "jerky movements" of the rupee and stressed that the Indian currency has witnessed the least depreciation in recent times.
"We will stand for its stability and we are doing it. We are there in the market and we will not allow disorderly movement of the rupee. We have no level in mind, but we will not allow jerky movement. That is for certain," Patra had said.
4. Rate hike by the US Federal Reserve
The US Fed is expected to aggressively raise rates by 75 bps in the upcoming meet. “The recent inflation print in the US has raised the expectations of a more aggressive rate hike by the Fed, lending further strength to the dollar,” added Shashank Mendiratta, an economist from New Delhi. Although US inflation data doesn't include the recent fall in crude prices, the number continues to be very high. Moreover, the lack of dollar inflows is also hurting the domestic currency as oil companies keep buying in the market, according to forex analysts. “markets are now pricing in a 100bps rate hike by the Fed later in the month. The same commentary has been reiterated by a few Fed officials after the US CPI report. This coupled with increasing risks of a global recession have contributed to a strengthening US dollar (currently hovering at a 20-year high) which will put further pressure on INR,” said Aditi Gupta, economist, Bank of Baroda.
5. Borrowed inflation
Experts say borrowed inflation is taking a toll on the Indian economy. Owing to the Russia-Ukraine war, inflation is hitting hard on countries across the globe leading to currency depreciation in most countries. India, despite its preventive measures, will be hit.
How does the fall in the value of the Indian rupee impact citizens?
India makes payments in US dollars, as the country mostly depends on imports, including crude oil, metals, electronics, etc. If the Indian rupee is weak, India must pay more for the same quantity of items, making the cost of raw materials and production go up, which gets passed on to the consumers.
At the same time, a weakening domestic currency boosts exports as shipments get more competitive and foreign buyers gain more purchasing power. However, what is cheap may not always be more in demand. In the prevailing scenario of weak global demand and persistent volatility, exporters are not supportive of the currency fall.
The greatest impact of the depreciating Indian rupee is on inflation, given India imports over 80% of its crude oil, which is the country's biggest import. The global crude prices have sustained at over $ 100 a barrel since Russia's invasion of Ukraine in February this year. High oil prices and a weaker rupee will only add to inflationary pressures in the economy.
How crude oil prices affect Indian rupee
India depends heavily on crude oil imports to meet over 80% of its energy requirements. Whenever oil prices see an uptick, it tends to pressurise the rupee as India’s import bills soar over higher crude prices.
In May, the Brent crude touched $ 110 a barrel, which jumped to $ 122 per barrel two weeks ago. But last week, Brent crude futures extended declines for a third session on Thursday, slipping under $ 100 a barrel, as fears of a potential global recession spurred concerns about oil demand.
When the oil prices rise, imports rise continuously. This pushes up the demand for the US dollar which strengthens the dollar against the rupee. The Indian rupee has been on the decline since January this year, this erodes the purchasing power of the Indian currency in the international market.