Why Has the Indian Rupee Reached an All-Time Low of 80.13 Against the Dollar?
As of late, India's national currency, the Indian Rupee (INR), has reached a historic low of 80.13 against the US Dollar (USD). This situation is not just concerning for the Indian economy, but it is also stirring up economic anxiety and uncertainty. The primary reasons behind this significant depreciation include the outflow of US investments, the hawkish stance of the Federal Reserve, and the broader economic challenges faced by India.
Market Factors and Economic Policies
The US elections have played a substantial role in the depreciating rupee. When Donald Trump was elected, fear of increased tariffs on Indian goods into the US market caused investors to pull out their investments and move them to the US. These foreign portfolio investments (FPI) are crucial for the Indian economy, and their withdrawal has exacerbated the situation.
While the situation could have been worse, the Reserve Bank of India (RBI) has been actively intervening to stabilize the currency. By continuing to provide dollars to the market through foreign exchange operations, the RBI has helped to stabilize the INR-USD exchange rate, preventing it from falling further. However, the challenge remains as India's balance of payments and foreign exchange reserves continue to be under pressure.
Hawkish Stance of the Federal Reserve
The move by the US Federal Reserve's new leader, Mr. Powell, to indicate a hawkish approach towards interest rates is another contributing factor. The general expectation was a more dovish stance, which would have supported the dollar. However, the reality is that the dollar index has surpassed its previous high, affecting not only the Indian equity and currency markets but also global markets. The RBI, in response, supplies dollars to the market to prevent the INR-USD pair from rising above 80.13.
Economic Challenges and Government Response
India's economy is facing significant challenges, including weak GDP growth, high population numbers, low quality of exports, corruption, and poor financial management. These issues have created a fragile economic environment, making it difficult to attract foreign investments and maintain a stable currency.
As India's foreign exchange reserves have dwindled by more than 20%, the situation has become more critical. The Reserve Bank of India has been taking proactive steps such as introducing the Rupee Settlement System, which facilitates international trade using the Indian Rupee, to boost confidence in the currency. However, despite these efforts, the rupee's value remains vulnerable to external economic pressures.
Future Outlook and Government Strategy
The US Federal Reserve's continued increase in interest rates is aimed at controlling inflation, but this action is also leading to a depreciation of the Indian Rupee. The RBI is using its foreign exchange reserves to control the Indian Rupee from falling further, but the pressure on the INR is likely to continue, particularly if the US dollar continues to strengthen.
Despite the challenges, the Indian government has introduced various measures to boost the economy and attract foreign investments. The finance minister, however, has been criticized for maintaining a denial mode and using outdated GDP statistics to support her claims. It is crucial for the government to adopt a proactive and fact-based policy approach to address the root causes of the economic challenges.
While the situation remains precarious, the resilience of the Indian economy and the ongoing efforts of the Reserve Bank of India provide some hope for a more stable rupee in the near future. However, it is essential to closely monitor the global economic trends, especially the actions of the US Federal Reserve, to understand the future trajectory of the Indian Rupee.