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The Indian rupee (INR) has recently reached an all-time low against the US Dollar (USD), sparking concerns about the currency’s continued depreciation. Analysts are now forecasting that the rupee could touch the 90 mark against the USD in the near future.
To understand why this is happening and assess the broader implications for India’s economy, it is crucial to explore the factors behind the rupee’s fall and whether a weakening of the INR/USD pair to 90 is in sight. Here’s an in-depth explanation of the currency fall.
A depreciation of up to 10% could occur as the RBI adopts a more flexible exchange rate regime, says Gavekal Research.
Why is the Indian rupee falling?
The Indian rupee has been under pressure due to multiple global and domestic factors. Globally, the US Dollar has strengthened amid a resilient US economy, higher interest rates, and geopolitical tensions. Domestically, India’s economic challenges, such as weak growth prospects, slowing capital inflows, and the Reserve Bank of India’s (RBI) currency intervention measures, have exacerbated the rupee’s depreciation.
How is the US Dollar contributing to the rupee’s decline?
The US Dollar has strengthened due to the robust performance of the US economy, which is growing faster than expected. Additionally, the Federal Reserve has taken a more hawkish stance, keeping interest rates higher for longer to combat inflation. This has made investments in US Dollar-denominated assets more attractive, drawing capital away from other emerging markets like India, where interest rates remain lower.
Why has the Federal Reserve’s policy stance impacted the US Dollar?
The Federal Reserve’s policy of maintaining elevated interest rates has encouraged higher returns on US financial assets, such as government bonds and equities. This creates upward pressure on the US Dollar because investors are drawn to these higher yields, leading to increased demand for the currency. As a result, the value of the US Dollar relative to other currencies, including the rupee, has increased.
What role do geopolitical tensions play in strengthening the US Dollar?
Geopolitical tensions, such as trade disputes and political uncertainty, often push investors toward safe-haven assets like the US dollar. In times of instability, investors seek currencies perceived as more stable, contributing to the rise in demand for the dollar and its resultant strength against other currencies, including the rupee.
How has the performance of other currencies, like the Euro and Yuan, influenced the dollar’s rise?
The US dollar’s rise is partly due to the weakening of other major currencies, particularly the euro and the Chinese yuan. The Eurozone faces persistent economic challenges, while China has allowed greater flexibility in its currency. These factors create a comparative advantage for the US dollar, further supporting its appreciation.
Why has the Reserve Bank of India (RBI) struggled to stabilise the rupee?
The RBI has been intervening in the foreign exchange market by selling dollars to limit the rupee’s depreciation. However, these interventions have led to a significant depletion of India’s foreign exchange reserves. Since October 2024, the RBI has lost USD 47 billion in reserves, draining approximately INR 4 trillion in domestic liquidity. This has created a deficit liquidity situation, complicating RBI’s efforts to stabilide the currency.
How has the RBI’s foreign exchange intervention impacted India’s economy?
The RBI’s efforts to stabilise the rupee through extensive foreign exchange interventions have had both positive and negative effects. On one hand, they provided temporary stability, especially amid global volatility. On the other hand, the drain in reserves has constrained domestic liquidity, limiting the RBI’s ability to support growth through monetary easing. Additionally, heavy reliance on foreign exchange reserves can lead to risk if external pressures continue to mount.
What does interest rate parity and price power parity indicate about the fair value of the rupee?
Based on interest rate parity, price power parity, and relative economic growth, the INR/USD fair value is estimated to be between 90-92. These models suggest that the rupee could depreciate by 7-10% from the current levels of around 84. This fair value reflects the misalignment caused by global and domestic factors, including currency inflexibility and economic disparities.
Why could the rupee reach 90 against the US Dollar in the coming months?
Analysts predict the rupee could reach 90 against the USD due to several underlying factors. These include the strengthening of the US Dollar driven by robust economic performance and monetary policy, coupled with India’s economic challenges such as slower growth, high inflation, and weakened earnings expectations. The RBI’s reduced ability to intervene further in the market also increases the risk of depreciation.
What would be the implications of a weaker rupee at 90 against the USD?
A weaker rupee at 90 against the USD could have mixed economic effects. Export-oriented sectors like IT and pharmaceuticals could benefit as Indian goods become more competitively priced internationally. However, sectors like banking and metals could face higher import costs, impacting profitability. Inflationary pressures may also rise, potentially reducing consumer spending and slowing economic growth.
How could changes in global monetary policy alter the rupee’s trajectory?
Global monetary policy shifts, such as changes in the Federal Reserve’s approach to interest rates, could impact the strength of the US Dollar and, in turn, the INR/USD exchange rate. If the Fed signals lower rates or changes its stance to support economic growth, the demand for the dollar could decrease, potentially alleviating some pressure on the rupee. Similarly, a slowdown in global growth could reduce upward pressure on the dollar.
What factors could potentially reverse the rupee’s depreciation?
Several factors could reverse the rupee’s depreciation, such as a shift in global economic conditions that weaken the US Dollar, improved domestic economic performance in India, or changes in RBI’s foreign exchange policy. Additionally, reducing external vulnerabilities, such as limiting current account deficits or addressing fiscal concerns, could help stabilize the currency.
How does the RBI’s current monetary policy stance affect inflation and growth?
The RBI’s cautious approach toward currency stability, through interventions and heavy forex reserve usage, impacts inflation and growth. While it prevents immediate currency volatility, it may limit the ability to cut interest rates to stimulate growth. A stronger rupee could ease inflationary pressures but may require higher currency depreciation to rebalance external trade imbalances.
Could political developments in the US or India affect the rupee’s movement?
Political developments in both the US and India can significantly affect the rupee’s movement. With Donald Trump returning to power, policies such as corporate tax cuts and trade protectionism could create a more volatile dollar and impact the rupee. Additionally, internal political stability and governance could influence investor sentiment toward Indian assets and currency.
What would be the broader sectoral impact of a depreciating rupee?
A weaker rupee could benefit export-oriented sectors like IT and pharmaceuticals by improving competitiveness. However, sectors sensitive to global commodity prices, such as metals and banking, could face challenges due to higher import costs. Volatility in capital flows and a shift in foreign investment could also impact equity markets.
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