Rupee Hits Record Low Amid Global and Domestic Pressures

Featured & Cover Rupee Hits Record Low Amid Global and Domestic Pressures

The Indian rupee continued its decline, reaching an all-time low of 85.35 against the US dollar in early trade on Friday. This marked the fourth consecutive session of depreciation, primarily driven by the robust dollar and heightened demand from importers. Adding to the pressure, foreign institutional investors sold shares worth Rs 2,376.67 crore in capital markets on Thursday, exacerbating the rupee’s struggles.

Domestic Challenges Compound Weakness

Domestically, the rupee’s depreciation has been influenced by a widening trade deficit and slowing economic growth. The currency has already dropped by 1.75% this quarter, reflecting deeper economic challenges.

Predictions for 2025

Economists expect the rupee to weaken further. Projections indicate the currency may touch 85.5 by the end of this fiscal year, with potential levels of 86 to 86.50 by December 2025. The Reserve Bank of India (RBI) is anticipated to intervene selectively in the foreign exchange market, curbing sharp appreciation while permitting controlled depreciation. This strategy is aimed at replenishing forex reserves, which have been depleted during prior interventions.

The RBI’s approach also aligns with global currency trends, including the depreciation of other major currencies such as the Chinese yuan. Analysts suggest that the dollar-rupee exchange rate could rise to 86-86.50 due to a combination of factors: a robust dollar index, persistent trade and fiscal deficits, increasing gold imports, and the possibility of foreign portfolio investors favoring China over India.

The Rupee’s Real Effective Exchange Rate

Despite the depreciation, the rupee demonstrated relative stability in November. The real effective exchange rate (REER), which adjusts the rupee’s value based on inflation and trade with key partners, appreciated to 108.14 in November from 107.20 in October—a 0.9% increase. According to an RBI report, this appreciation counterbalanced adverse price differentials, highlighting the rupee’s comparative steadiness amid global economic turbulence.

Emerging market currencies faced intense pressure in November due to foreign portfolio outflows, a stronger dollar, and rising US Treasury yields. Nevertheless, the rupee’s modest 0.4% depreciation against the dollar underscored its resilience. Additionally, it recorded the lowest volatility among major currencies, reflecting its relative strength in a volatile global environment.

Impact of a Strong Dollar

The dollar remains firmly supported, bolstered by expectations of expansionary policies under Donald Trump’s administration when he takes office in January 2025. Anticipated policies aimed at boosting growth and inflation have driven up US Treasury yields, strengthening the greenback. The dollar index has gained over 7% this quarter, remaining above the 108 level. This dollar strength continues to weigh on the rupee and other Asian currencies.

While these dynamics present challenges, proactive interventions by the RBI have helped the rupee display resilience compared to its peers.

Implications for India’s Import Bill

A depreciating rupee could increase India’s import bill by $15 billion if external conditions remain unchanged. Although short-term relief may come from low oil prices, other import-dependent sectors are vulnerable to cost pressures.

India imports 58% of its edible oil needs and 15-20% of its pulses consumption, leaving these commodities particularly susceptible to rising prices. This could strain food security and elevate fiscal burdens.

Similarly, higher prices for imported fertilisers like urea and DAP may exacerbate fiscal challenges.

Industrial imports, especially from China, represent another concern. India annually imports $100 billion worth of industrial goods from China. Sectors like electronics, where 80–90% of smartphone components are imported, may face costlier imports.

Additionally, India’s reliance on imported coal for thermal power and steel production heightens its exposure to currency fluctuations. For every one-rupee depreciation, coal-based electricity generation costs increase by 4 paise per unit, potentially impacting 75% of India’s electricity generation.

Managing Volatility in the Rupee

The Reserve Bank of India must adopt a nuanced strategy to manage currency volatility while addressing broader economic challenges. Experts suggest that gradual depreciation could offer multiple advantages:

  1. Boosting Export Competitiveness: A weaker rupee enhances the global appeal of Indian exports, potentially narrowing the trade deficit.
  2. Monetary Flexibility: With reduced focus on currency intervention, the RBI can allocate resources to tackle domestic economic priorities.
  3. Avoiding Disruptions: A measured depreciation reduces the likelihood of abrupt and destabilizing adjustments in currency markets.

The rupee’s trajectory will hinge on global economic trends, India’s growth prospects, and the broader outlook for emerging markets. Nations such as China, Brazil, and South Africa are also grappling with economic vulnerabilities, with geopolitical developments further influencing currency dynamics.

Broader Implications and the Path Forward

Policymakers in India face a delicate balancing act as external pressures and domestic vulnerabilities persist. While short-term currency interventions can provide temporary relief, a strategic approach focusing on gradual depreciation and boosting export competitiveness is crucial for long-term resilience.

By adopting this measured approach, the RBI can strengthen the economy’s capacity to withstand external shocks, ensuring stability in the face of global uncertainties.

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