Editorial

Published: Apr 30, 2022
Updated: Apr 30, 2022

Rupee's Fall, Headache for All

There is more bad news for the Indian economy which is already reeling under red-hot inflation, with the rupee losing strength against the US dollar day by day. On May 9, 2022 the Indian currency slumped to an all-time low of Rs 77.52 against the greenback, and within a week went down further to Rs 77.87. For several years, under a regulatory regime, a dollar used to fetch only Rs 35. By now that figure has more than doubled and the rupee continues to be shaky vis-a-vis the US currency.

The rupee’s crash is mainly on account of a strengthening dollar. A strong US dollar weakens the currencies of other countries, particularly of emerging nations like India. The runaway rise in global crude oil prices has administered a further blow as India depends on imported crude oil to the tune over 70 per cent of its requirements. The sharp rise in interest rates by the central banks of the US, the UK, Australia and India have also hit the Indian rupee. While the interest hike by the US Federal Reserve has strengthened the dollar, the steep hike (4.4 per cent) in its repo rate by the Reserve Bank of India has pushed up inflation, which in turn has aided the downward drift of the rupee.

As if this was not enough, the rising strength of the US dollar and the weakening value of the Indian rupee has a detrimental effect on the Indian economy. Foreign investors have started withdrawing their investments in the Indian stock market. During the current year so far, FPIs have withdrawn around $ 19 billion from the Indian market. This has dealt an additional blow to the Indian currency. Explaining the FPIs’ move, a senior official of an FPI says “these foreign investors have been losing around 15 to 17 per cent in recent months on account of the currency depreciation.”

The weakening rupee adversely affects the economy. Among other things, it widens the current account deficit. Says Soumy Ajit Niyogi, director of India Ratings and Research, “We are facing multiple challenges – high oil prices are stoking retail inflation and with a weak rupee the adversities will only increase. The current account deficit in rupee terms will be much more impacted.” Data suggests that import activity is still very resilient and the rupee’s fall will impact it. Importantly, in uncertain times, people have more faith in gold, so gold imports is another cause for concern. In fact, the entire current account deficit, including on gold imports, will go up faster due to the rupee’s depreciation.

Again, the ability of companies and banks to service foreign debt will become strained as the rupee depreciates. Banks, especially PSU banks, who have been actively raising money from offshore markets will find it costlier to service their debt due to the rupee’s depreciation.

Moreover, the depreciation of the rupee will cause a decline in our purchasing power. For exporters as well as for students and travellers heading overseas, the fall in the rupee will mean reworking their expenses, buying an asset abroad in the Indian currency will be expensive, and education and holidays in foreign countries will turn more expensive. The current trend will also decrease the purchasing power of the nation.