The Indian rupee has recently dropped to a record low of ₹84.07 against the US dollar, raising concerns about its implications for everyday life and the economy. So, let’s see how this happened and how does it affect us.
How did we reach here though?
The rupee's decline is largely driven by high demand for dollars from foreign banks and significant outflows from local equities. In just ten sessions, foreign investors have pulled out around $8 billion from the Indian market. Despite the Reserve Bank of India's (RBI) efforts to stabilize the currency over the past two months, external factors - like disappointing economic stimulus news from China and weakness in other Asian currencies - have added pressure on the rupee.
How much did the Rupee fall?
On October 11, 2024, the rupee closed at ₹84.07 against the dollar, briefly dipping to 84.10 during trading. This marks a notable decline from ₹83.98 per dollar just a day earlier. Analysts note that the rupee has hovered above ₹84 largely due to RBI interventions, which have been crucial in maintaining some level of stability. Interestingly, on September 12, it had reached a previous low of ₹83.99.
What triggered this downward slope?
Several factors contributed to this downward trend:
- Rising Crude Prices: Increased oil prices have put additional strain on the rupee.
- Foreign Funds Shifting to China: Investors are moving their money towards Chinese stocks, which are perceived as undervalued.
- Increased Dollar Demand: Foreign banks are demanding more dollars, further weakening the rupee.
Interestingly, a softer US Dollar Index - due to higher-than-expected unemployment claims in the US - has somewhat mitigated a sharper decline. While domestic equity markets showed signs of recovery, heavy selling by foreign institutional investors (FIIs) and high oil prices limited any gains for the rupee.
Why are foreign investors selling?
Foreign portfolio investors (FPIs) have adopted a “Sell India, Buy China” strategy following recent monetary and fiscal measures in China aimed at boosting its economy. Up until October 11, FPIs sold a staggering ₹58,711 crore in equities and ₹1,635 crore in debt. This marks a significant reversal from four months of buying where they had invested ₹1.24 lakh crore in stocks.
What’s the scope now?
Analysts predict continued volatility for the rupee due to uncertainties surrounding crude oil prices and fluctuations in the dollar index. They foresee a negative bias for the rupee, especially with ongoing FPI selling and geopolitical tensions in regions like the Middle East. Jateen Trivedi from LKP Securities anticipates that if the rupee stays below 84, it could weaken further to levels between 84.25 and 84.35, with support at 84.20-84.35 and resistance at 83.70-83.80.
Now, how does all this affect us?
Imports
The depreciation of the rupee makes imports more expensive - especially oil, cars, and appliances - leading to higher consumer prices. This increase could further fuel inflation, which is already high, impacting overall affordability and financial stability for many households.
Loans
As import prices rise due to a weaker rupee, inflation is likely to follow suit. In response to these pressures, the RBI raised the repo rate by 40 basis points to 4.40%, leading banks to increase their lending rates as well - making EMIs costlier for borrowers.
Stocks, foreign education, travel, remittances & more
The rupee's decline is also impacting foreign investments in Indian equities, potentially leading to lower returns for stock and equity mutual funds. Additionally, as the rupee loses value against the dollar, studying abroad becomes more expensive for students - requiring adjustments in budgets for tuition and living expenses.
The RBI can intervene by releasing dollars into the market; however, its forex reserves have fallen below $600 billion for the first time in a year, raising questions about its ability to manage this situation effectively.
Overall, while there are many factors at play regarding the rupee's decline - including foreign investor behavior and global economic conditions - the impacts are felt directly by consumers through rising costs and financial pressures. The future remains uncertain as we navigate these economic challenges together.
Let us know in the comments what you hope doesn’t get expensive!
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