Rupee’s fall: The rupee hit a fresh low against the dollar on Monday, slipping to 84.12 per dollar as foreign investors offloaded domestic equities, adding pressure despite strength in other Asian currencies. A rise in crude oil prices further weighed on the rupee. However, the Reserve Bank of India intervened by selling dollars to cushion the rupee from further depreciation. By the closing bell on Tuesday, the rupee had slightly recovered, settling at 84.10 due to a domestic market rally and suspected additional intervention by the RBI.
The rupee’s recent depreciation comes as the dollar itself weakens due to disappointing economic data in the United States. However, the fall in the Indian rupee is driven by multiple other factors, according to market analysts.
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Factors dragging down the rupee
The primary factor is the rise in crude oil prices. Brent crude rose by 0.19%, reaching $75.22 per barrel in futures trading. Higher oil prices lead to increased import costs for India, a net oil importer, thereby raising demand for dollars and pushing the rupee lower. Market analysts believe that geopolitical tensions, particularly in West Asia, have disrupted plans to increase OPEC+ oil production. This delay has caused oil prices to surge, with the Organisation of Petroleum Exporting Countries and allies postponing their planned production boost by at least a month.
Additionally, persistent outflows of foreign funds have contributed to the rupee’s depreciation. On Monday, Foreign Institutional Investors (FIIs) were net sellers, unloading shares worth Rs 4,329.79 crore. Many FIIs are shifting investments to China, where the government is offering attractive incentives to attract foreign capital as it seeks to revitalise its economy. Disappointing corporate earnings and high valuations in the Indian market have further impacted its appeal to foreign investors.
Beyond immediate market factors, structural economic weaknesses are also amplifying the rupee’s decline. India’s current account deficit remains elevated due to a dependency on imports for energy and critical materials. Despite efforts to boost domestic production through initiatives like ‘Make in India’, reliance on imports for sectors such as electronics, machinery, and chemicals has not decreased significantly. This structural trade imbalance, compounded by limited export diversification, continues to pressure the rupee, especially in times of rising global commodity prices. Additionally, the high external debt burden in corporate and government sectors increases the rupee’s vulnerability to global interest rate hikes.
The ongoing depreciation also heightens the risk of fiscal strain. As the rupee weakens, government subsidies for imported energy and fertilisers could lead to a budget deficit exceeding targets, creating challenges for fiscal planning. The government may face difficult choices between increased borrowing and curbing development spending. Economists warn that if the depreciation trend continues, it could necessitate additional fiscal adjustments or cuts in government programmes, which would weigh on growth prospects. Balancing the need for welfare and infrastructure spending with a depreciating currency could complicate India’s fiscal roadmap in the coming quarters.
Implications of a falling rupee vs dollar
The weakening currency signals growing challenges for the Indian economy. Exports have been slowing, and foreign direct investment (FDI) inflows have also softened. For an import-dependent country like India, a depreciating rupee translates into higher import bills, which, combined with elevated oil prices, is likely to exacerbate inflationary pressures.
The stock market reacted sharply to the rupee’s fall, with the BSE Sensex plunging 941.88 points (1.18%) to close at 78,782.24, and the Nifty shedding 309 points (1.27%) to settle at 23,995.35.
A weaker rupee particularly affects sectors reliant on imported inputs, like electronics, automotive, and pharmaceuticals, as their production costs rise with each dollar increase. Companies in these sectors may face narrowing profit margins, which could lead to higher prices for consumers or cuts in production if the trend persists.
Information technology (IT) and software services — typically beneficiaries of a weak rupee due to dollar-denominated contracts — might not gain as significantly this time, given the recent pullback in global tech spending and rising recession fears in key markets like the US and Europe. The simultaneous impact on multiple sectors could weigh on GDP growth, adding to the challenges for policymakers.
Rising challenges for policymakers
The coming months will test the government and policymakers, as India is already experiencing a demand slowdown due to high food inflation. Even during the festive season, sales of FMCG products, automobiles, and white goods remained sluggish, reflecting a cash crunch among middle-class consumers. Further depreciation of the rupee could worsen this trend.
A declining rupee also raises the cost of foreign borrowing for Indian businesses and the government. As the rupee weakens, interest rates on foreign currency loans increase, making it more challenging to obtain credit. This leads to higher EMIs on existing loans and increased costs for new borrowings. Rising borrowing costs may dissuade Indian businesses from pursuing new investments and expansion plans, potentially stalling capital expenditure (capex) growth and delaying critical infrastructure projects.
RBI’s limited capacity for intervention
While a weaker rupee could theoretically stimulate exports by making Indian goods more competitive internationally, the current global environment of subdued demand and high market volatility has muted the potential benefits. Exporters remain cautious, as unpredictable market conditions limit the potential gains from a weaker currency.
The RBI’s ability to ease monetary policy may also be delayed due to the rupee’s weakness, as the central bank often adopts a hawkish stance to defend the currency. This creates a double burden for the public, who are already coping with high inflation, as essential commodities like fuel—diesel, petrol, and cooking gas—are expected to become even more expensive.
While the RBI has intervened to curb volatility, its capacity for sustained interventions is limited by the risk of depleting foreign exchange reserves. Analysts have noted that using reserves to support the currency could, over time, signal to markets that India lacks the fiscal or monetary resilience to maintain exchange rate stability.
Some economists suggest that rather than intervening, a more sustainable approach would involve policy measures to address fundamental economic weaknesses, like boosting exports and reducing oil dependency. Nevertheless, balancing short-term currency stability with long-term economic resilience will be a crucial challenge for the RBI.
The RBI has been actively intervening in the currency market to slow the rupee’s depreciation, though its resources are not unlimited. India’s foreign exchange reserves have fallen from $704 billion at the start of October to $684 billion by month-end, indicating nearly $20 billion spent on intervention.
The rupee is expected to trade with a negative bias due to continued weakness in the domestic markets and sustained FII outflows. However, a softening US dollar, amid weaker-than-expected job market data, might offer some support. Traders will be closely monitoring upcoming US factory orders data and the Federal Open Market Committee (FOMC) meeting for further signals. The USD/INR spot price is likely to fluctuate within the range of 83.95 to 84.30 in the near term.