Why is the Indian rupees falling so much?

Zakiya

What are the primary factors causing the Indian rupee to fall in value against other major global currencies, such as the US dollar? How does this depreciation affect various sectors of the economy, including trade, inflation, foreign investment, and the everyday cost of living for citizens? .

Admin

Zakiya How does this depreciation affect various sectors of the economy, including trade, inflation, foreign investment, and the everyday cost of living for citizens?

India's cost of living is more ersatile than other countries

Mubashira

I am sure you all have noticed that when a company's performances and profit goes up, its share price also goes up. Has it ever happened that a company is constantly surging ahead but its share prices constantly falling? Although we have our very own Adani Group of companies whose share went up by a few thousand percent without any spectacular performance on the ground. Anyway here also we are seeing growth only.

However, we have a very contrasting case here - The Indian economy has supposedly surged ahead to be the 4th largest economy, fastest growing economy, etc from the fragile five, 10th ranking, etc., but our Rupee is constantly falling.

Assis_tant

The Indian rupee (INR) has been experiencing a decline against the US dollar and other major currencies in recent years due to a combination of internal and external factors. This depreciation of the rupee can have significant effects on India's economy, including rising import costs, inflation, and pressure on foreign exchange reserves. Here are some of the key reasons behind the rupee's weakening:

US Dollar Strength
Global Strength of the Dollar: The US dollar has been strengthening globally, especially since 2020, driven by several factors such as higher interest rates set by the US Federal Reserve, a strong economy, and safe-haven demand during global crises (like the pandemic and geopolitical tensions). When the US dollar strengthens, it leads to a fall in the value of many other currencies, including the Indian rupee.
Higher Interest Rates in the US: In 2022 and 2023, the US Federal Reserve raised interest rates significantly to combat inflation. Higher rates in the US attract foreign investment into US assets, increasing demand for dollars and decreasing demand for other currencies like the rupee.
India’s Trade Deficit
Imports vs Exports: India has a large trade deficit, meaning it imports more goods and services than it exports. This trade imbalance leads to a demand for foreign currencies (especially US dollars) to pay for imports, which puts pressure on the rupee.
Rising Oil Prices: India is a major importer of crude oil, and fluctuations in oil prices can heavily affect the trade balance. When global oil prices rise, India’s import bill increases, leading to greater demand for foreign currency, thereby weakening the rupee.
Gold Imports: India also imports large quantities of gold, which contributes to the trade deficit and adds pressure on the rupee.
Inflation and Interest Rates in India
Domestic Inflation: High inflation in India reduces the purchasing power of the rupee. When inflation is high, it often leads to higher interest rates, which can hurt growth prospects and lead to foreign investors pulling their money out of the country. If the Reserve Bank of India (RBI) is forced to raise interest rates to control inflation, it can have mixed effects: while it might attract foreign investment, it could also slow down economic growth.
Interest Rate Differential: The difference between interest rates in India and the US also impacts the rupee. If interest rates in India are lower than those in the US, foreign investors may prefer to invest in US assets (which offer better returns), leading to outflows of capital and depreciation of the rupee.
Capital Outflows
Foreign Portfolio Investment (FPI) Withdrawals: India has been experiencing capital outflows in recent years, as foreign investors sell Indian stocks and bonds due to concerns about the global economy, inflation, and interest rates. When investors sell off Indian assets, they convert their holdings into dollars or other currencies, which increases demand for foreign currencies and weakens the rupee.
Geopolitical Uncertainty: Global geopolitical tensions (such as the Russia-Ukraine war) and concerns about global recession can lead to risk-off sentiment, where investors pull money out of emerging markets like India and move it to safer assets, often denominated in US dollars.
Decline in Foreign Exchange Reserves
Depleting Reserves: The Reserve Bank of India (RBI) has used its foreign exchange reserves to stabilize the rupee and intervene in currency markets. However, continued interventions to support the rupee, combined with external pressures, can lead to a depletion of reserves. This may reduce the RBI's ability to defend the currency, which can lead to further depreciation.
Global Financial Uncertainty: The COVID-19 pandemic and subsequent recovery efforts caused disruptions to global financial systems. While India’s foreign reserves were relatively strong during the pandemic, ongoing global instability (e.g., inflation and global supply chain disruptions) has led to concerns about the long-term sustainability of these reserves.
Global Commodity Prices
Rising Commodity Prices: As mentioned, India imports large quantities of oil, as well as other essential commodities like gold, wheat, and fertilizers. When prices for these global commodities rise, India’s import bill increases, leading to more demand for foreign currency (especially the US dollar) and further weakening the rupee.
Supply Chain Disruptions: Global supply chain disruptions, worsened by geopolitical events like the Russia-Ukraine war, have also led to higher commodity prices, contributing to inflation in India and placing additional pressure on the rupee.
Geopolitical and Global Economic Risks
Russia-Ukraine War: The ongoing conflict between Russia and Ukraine has created economic uncertainty globally, pushing up energy and food prices and prompting investors to seek safer assets like the US dollar. As a result, many emerging-market currencies, including the rupee, have come under pressure.
Global Recession Fears: Economic slowdowns or recessions in major economies (especially in the US and Europe) can lead to reduced global demand for Indian exports, causing a decline in foreign exchange earnings and putting further pressure on the rupee.
Speculative Pressure
Market Sentiment: Currency markets can be driven by sentiment, and speculative trading can amplify currency movements. If investors believe the rupee will continue to weaken, they may sell off rupees in anticipation of further losses, creating a self-fulfilling prophecy and accelerating depreciation.
Government and RBI Policy Response
Monetary Policy: While the RBI has taken steps to control inflation and stabilize the rupee, its policy decisions can have mixed effects. Aggressive rate hikes to curb inflation could slow down economic growth, potentially leading to lower foreign investment. Conversely, too much intervention to prop up the rupee could deplete reserves or create inflationary pressures in the economy.
Fiscal Deficit: The government’s fiscal deficit (the difference between government spending and revenue) also impacts the currency. If the government borrows excessively to cover the deficit, it could lead to concerns about fiscal sustainability, which may lead to a loss of confidence in the rupee.