Why in news?

On October 11, 2024, the Indian rupee ended above the 84 per US dollar mark for the first time, closing at 84.07 after touching 84.10 during the day. A day before, the rupee had closed at 83.98.

The fall came amid outflows from foreign institutional investors, concerns over rising oil prices, and higher demand for the US dollar from foreign banks.

What’s in today’s article?

• Falling rupee – Meaning, reasons, impact
• Outlook for the Rupee

Falling rupee

• Meaning
  • When it is reported that the rupee has fallen to a low of 80 dollars, it basically means that one needs Rs 80 to buy a single dollar.
    • This is important when buying not just American goods but also other goods and services (say crude oil).
  • In a free-market economy, the exchange rate is decided by the supply and demand for rupees and dollars.
  • If, in India, demand for dollars is more in comparison to the demand for rupee, the exchange rate will fall or weaken for rupee and rise or strengthen for dollar.
  • However, in India, the market does not fully determine the exchange rate. RBI occasionally intervenes in the foreign exchange (forex) market to ensure that the rupee's price does not fluctuate too much.
• Reasons for falling rupee
  • Rising Crude Oil Prices: Increased oil prices have raised concerns about India's trade deficit and inflation.
    • The West Asia crisis has a bearing on the oil prices.
  • FII Outflows: Foreign investors are moving funds to China, following China's stimulus measures.
    • Foreign investors have been following a strategy of ‘Sell India, Buy China’ after the Chinese authorities announced monetary and fiscal measures to stimulate the slowing economy.
  • Increased Demand for the US Dollar: Foreign banks are demanding more US dollars, further pressuring the rupee.
  • Weak Domestic Markets: Local stock market performance also contributed to the rupee’s decline.
• Impact
  • It could increase cost of imports, raise overseas education costs, make foreign loans costly for companies and has the potential to stoke inflation, which is already ruling at 7%.
  • 
  • Impact on inflation management
    • The most crucial impact would be on inflation as the country imports nearly 80% of its crude oil needs.
    • This would mean that imports would become costlier and travel through the value chain to raise input costs.
  • Impact on current account deficit
    • Since a large proportion of India’s imports are dollar-denominated, these imports will get costlier.
    • Costlier imports, in turn, will widen the trade deficit as well as the current account deficit, which, in turn, will put pressure on the exchange rate.
  • Positive impact
    • One positive impact could be that remittances from overseas could become attractive.
    • A fall in the rupee can also benefit India's exporters - unless they import raw materials, which would become more expensive.
  • Steps that could be taken to prevent the slide
    • Sell large amounts of dollars to support rupee (by increasing the supply of dollar)
    • Raising interest rates to make Indian investment attractive
    • Removing reserve restrictions on dollar deposits with banks
    • Allowing traders to make settlements in rupee to reduce dollar dependence.

Outlook for the Rupee

• Analysts expect the rupee to remain volatile, driven by uncertainties in oil prices and fluctuations in the dollar index.
• The rupee may face continued pressure from FPI selling and geopolitical uncertainty, particularly from tensions in the Middle East.