Context:
The Rupee closed at an all time low breaching the ₹87/USD mark amid global economic shifts, trade tensions, and domestic financial vulnerabilities that triggered the decline and exposed the resultant concerns over inflation, foreign investment, and economic stability, while at the same time creating prospective benefits for exporters, remittance inflows, and some economic interests.
Factors Behind The Falling Trend Of Rupee
- Stricter US Dollar
- The dollar index surged to 1.24% high at 109.84, the US labour market data seems robust, increased Treasury yields due to expectations from a prolonged series of high-interest rates.
- Emirating economies’ currencies also the rupee is weaker along with volatility amid the dollar increase.
- Increasing Global Tensions Over a Trade War
- US President Donald Trump’s protectionist policies are increasing global trade uncertainties with fresh tariffs on Canada, Mexico and China.
- It has added yet another pressure line on the other two countries of North America–Canada and Mexico, which are exporting $840 billion worth of goods to US. China now faces a prospective 10 percent tariff, where the Yuan got weakened, adversely affecting the Rupee.
- Constant FII flows out
- FIIs have withdrawn $11 billion from Indian markets since October 2024, which is further intensifying currency pressure.
- Investors are moving their capital to safer US assets, thereby further depreciating the rupee.
- Widening Trade Deficit
- India’s trade deficit has jumped to $188 billion, with an 18% increase from FY24.
- High dependence on crude oil and imported goods has worsened the imbalance, making the rupee more vulnerable.
- RBI’s Response and Policy Outlook
- The Reserve Bank of India (RBI) has sold $3.3 billion in forex reserves over the past seven weeks to curb volatility.
- With inflationary pressures rising, all eyes are on the RBI’s upcoming monetary policy review, which could influence future interventions.
Implications of a Weaker Rupee
The Downside
- Higher Import Costs & Inflation
- Costlier crude oil and imports will increase production costs, impacting businesses and consumers.
- Rising Foreign Debt Burden
- Companies would face higher payout costs in dollar terms, making balance sheets heavy and affecting all investment decisions.
- Capital Flight & FDI Risks
- A bad rupee will trigger capital flights, deter new FDI and raise market volatilities.
- Weaker Consumer Sentiment
- Reduction in purchasing power will slow the demand and affects the overall GDP growth.
The Upside
- Increased Export Competitiveness
- Weaker rupee makes Indian exports more attractive, and thus obviously beneficial for IT, pharmaceuticals, and textiles industries.
- Increased Remittances Inflows
- Specific gains to Indians abroad through better exchange rates; now, there would be higher remittances inflows promoting domestic consumption.
- Economic self reliance by the government India is attempting to improve domestic competitiveness through policy reforms and trade strategies rather than depending on currency devaluation.
