As of 17 November 2024, the Indian rupee (INR) has continued to weaken, reaching a historic low of Rs 84.4 per U.S. dollar. This decline reflects both global and domestic challenges, prompting concerns about its impact on various parts of the Indian economy. To understand this situation, let’s first explore how exchange rates work and why the rupee has been losing value.
How Exchange Rates Work
Currency exchange rates, such as USD/INR, are influenced by the supply and demand of different currencies. For instance, a traveller exchanging rupees for U.S. dollars might find the rate to be Rs 83 per dollar one day and Rs 84 the next. This change happens because demand for dollars has risen, making the rupee relatively weaker.
When global factors like robust U.S. economic policies or higher investment returns in the U.S. increase the demand for dollars, the value of the rupee depreciates. This change is often described as the rupee “falling” against the dollar.
Reasons Behind Rupee’s Fall
Strengthening U.S. Dollar: The U.S. dollar has gained strength due to policies introduced during President Trump’s tenure, such as tax reductions, increased government spending, and relaxed regulations. These measures have made the dollar more attractive to investors worldwide. Additionally, higher U.S. interest rates have encouraged a shift towards dollar-based investments, putting pressure on the rupee.
Rising Oil Import Costs: India depends on imports for 87% of its oil, which is priced in dollars.
As the rupee weakens, oil imports become more expensive. In FY24 alone, India spent roughly $134 billion on oil imports, and the depreciating rupee has inflated these costs, worsening the trade deficit — the gap between the value of imports and exports.
Increasing External Debt Costs: Indian companies with loans denominated in dollars now face higher repayment amounts. For example, a loan taken when the exchange rate was Rs 83/USD will now require Rs 84.4 per dollar for repayment. India’s external debt, which reached USD 682 billion by June 2024, has grown costlier due to the rupee’s decline.
Imported Inflation: The weakening rupee raises the price of imported goods, particularly oil, creating a ripple effect on costs throughout the economy. Items like fuel, plastics, and fertilisers become more expensive, which in turn increases inflation and affects purchasing power.
Geopolitical Tensions: Trade tariffs imposed by the U.S. on China could weaken the Chinese renminbi, indirectly impacting other Asian currencies, including the rupee. A similar situation in 2018 saw the renminbi drop by 10%, disrupting markets across the region.
Sectors Affected by Weak Rupee
1. Winners:
• IT and Pharmaceuticals: These sectors earn significant revenue in dollars from overseas clients, particularly in the U.S. A stronger dollar means higher rupee earnings when revenues are converted back to the local currency.
• Textile Exports: The weaker rupee makes Indian textile products more affordable in global markets, increasing demand. The “China+1” strategy, where global firms seek suppliers outside China, further supports Indian exports.
2. Losers:
• Energy and Manufacturing: Industries relying heavily on imported raw materials, such as energy, transportation, and chemicals, face rising costs. These higher input prices can lower profits and lead to increased consumer costs.
Policy Measures to Address Rupee Depreciation
The Reserve Bank of India (RBI) has taken steps to manage volatility in the forex market, preventing excessive declines in the rupee. However, such interventions deplete foreign exchange reserves, limiting their long-term use.
Policymakers need to adopt a combination of strategies to stabilise the rupee and reduce its economic impact:
Boost Exports: Encouraging reforms to make Indian exports more competitive can help narrow the trade deficit and support the rupee.
Attract Foreign Investments: Creating a stable and investor-friendly environment can draw more foreign capital, balancing outflows.
Reduce Oil Dependency: Accelerating the shift to renewable energy and increasing domestic oil production can lessen the economy’s vulnerability to oil price fluctuations.
Control Inflation: Targeted fiscal measures can help manage inflationary pressures and support sectors most affected by rising costs.
The rupee’s depreciation highlights vulnerabilities within the economy but also provides opportunities for sectors like IT and textiles to grow.
Addressing structural issues, managing inflation, and encouraging exports can help India navigate these challenges.
[The writer possesses a fascination with the world of business and the intricacies of stock markets]
