Wednesday, 09 Oct, 2024
By: Anshul Vipat
After recovering for a bit, the Indian rupee has again slumped to 83 per US dollar early this week. Image source: IANS
The rupee was trading at a session-high of 83.04 per U.S. dollar this week, compared with 81.45 in the previous session
After recovering for a bit, the Indian rupee has again slumped to 83 per US dollar early this week. The rupee was trading at a session-high of 83.04 per U.S. dollar this week, compared with 81.45 in the previous session. In July, the rupee had touched a historic low of Rs 80 per dollar. Since then, the rupee remained in the steady bracket. It improved to 79 per dollar in the last week of September, but fell back to 81 the next week. The slump continued throughout the month, as rupee has fallen to its lowest level ever.
The Indian currency has now lost around 2 percent this month and close to 12 percent against the American dollar in 2022. The slump in the past 15 days is largely attributed to foreign institutional investor (FII) outflows.
As money flows out of India, the rupee-dollar exchange rate gets impacted, depreciating the rupee. So far in October, FIIs have already sold ₹2,806 crore including equity, debt and hybrid assets. Data from the Centre for Monitoring Indian Economy (CMIE), showed that Foreign institutional investors have pulled out over Rs 1,50,000 crore in the first five months of 2022 itself. This is almost equal to what they brought between 2014 and 2020. This also affected the foreign investment flows. FDI tapered off sharply in August 2022. They dropped to USD 1.1 billion during the month. This is the lowest since April 2017, if the first quarter of 2020-21, the peak period of the first wave of the pandemic and the resulting lockdown.
If we take a close look at the chart above, we will see an upward tick in August This was when the rupee largely remained stabled. However, the situation changed in October leading to a slump in Indian currency. From Rs.79.92 per US dollar on September 21, it depreciated to Rs.82.4 per US dollar on October 7. The exchange rate had averaged at Rs.79.68 per USD in the first three weeks of September.
American effect on Indian rupee
The CMIE data also reveals an interesting co-relation. A hike in US policy rate leads to a flight of FII capital which in turn ends up in a sharp fall in the INR/USD exchange rate. On September 21, the US Federal Reserve hiked its policy rate by 75 basis points (bps). On that particular day, the Indian rupee slipped to a record low of 80.86 against a US dollar as compared to its previous day's close at 79.97. This was the biggest single-day decline in the value of the rupee in seven months.
When the interest rate is increased in the US the investors pull assets away from the emerging markets. Due to high interest rate capital flows more toward the American economy. The rate hike, according to CMIE, led to FII outflows from India.
Past patterns suggest that a hike in US interest rates is usually matched with a hike in Indian interest rates. This is justified because domestic inflation is high and the Monetary Policy Committee (MPC) of the RBI tries to rein in inflation through interest rate hike like the US Fed does in the US.
The Fed has increased the rate by 75 basis points thrice since June. On the other hand, the Reserve Bank of India (RBI) has hiked the policy repo rate by 190 basis points since April. So far in 2022, the RBI has hiked the policy repo rate four times, US Federal Reserve has also increased the interest rate thrice so far this year. However, the Fed has been more aggressive in hiking interest rates when compared with the RBI. The cumulative increase in interest rate by the US Fed is 300 basis points or 3 per cent. To sum up the economic slump in US, the intrest rate in the country was almost zero at the start of the year.
Woes to increase
Despite US central bank increasing interest rates, the country's inflation rate refuses to slow down. US retail inflation for September remained high at 8.2 per cent. Inflation in the US has persisted at a 4-decade high. According to experts, a hike of 75 bps in interest rates in the next meeting of the US Fed in November is almost certain. This is expected to lead to another round of FII outflows, and, consequently, rupee depreciation. This will likely force RBI to notch up interest rates in its December meet. This will further put pressure on the INR/USD exchange rate.
Consequently, the pressure on rupee is unlikely to ease in the near future. Easing of the trade deficit and sustained high capital flows are the only two factors that can help reverse the current weakening of the rupee. But this seems unlikely in the near future.
Impact on you
Such depreciation puts considerable pressure on the already high import price of crude and raw materials. India currently imports 85% of its oil demand and the rise in crude oil prices directly increases import bill and expenses. All this leads to inflation, and a depletion of our forex reserves because we’re sending out more dollars on crude oil. The inflation rate continued to breach RBI’s comfort zone of 2-6 percent for the ninth consecutive month. On the other hand, retail inflation has galloped to a 24-month high in September at 7.8 percent.
Apart from crude oil, New Delhi is also heavily dependent on fertilizer imports and fertilizer subsidy is set to hit a record high. Organic chemicals, machinery items, electronics and pharmaceuticals, labour-intensive exports like textile may also take a hit.
