Rupee Breaches 87-level Against Dollar

Syllabus: GS3/ Economy

In News

• The Indian Rupee (INR) has witnessed a sharp depreciation, breaching the 87-mark against the US Dollar, reflecting broader global economic shifts and domestic financial concerns. 

Key Factors Behind the Rupee Depreciation

• Strengthening US Dollar: The Dollar Index surged 1.24% to 109.84, reflecting increased investor confidence in the US economy. Robust job data, expectations of prolonged higher interest rates, and rising US Treasury yields have made the dollar more attractive.
• Escalating Trade War Fears: US President Donald Trump’s tariffs on Canada, Mexico, and China have heightened global trade tensions. Canada and Mexico, which export over $840 billion worth of goods to the US, have announced retaliatory measures. China faces a potential 10% tariff, which has weakened the Yuan, indirectly impacting the Indian Rupee.
• Foreign Institutional Investor (FII) Outflows: FIIs have been aggressively selling Indian assets since October 2024, withdrawing $11 billion in Q3 FY25, adding further pressure on the currency.
• Widening Trade Deficit: India’s trade deficit has reached $188 billion, up 18% from FY24, reflecting the high import dependency, especially on crude oil.
• RBI’s Intervention and Monetary Policy Outlook: The Reserve Bank of India (RBI) has been managing the currency volatility through forex interventions, selling $3.3 billion in reserves over the last seven weeks. However, with inflation concerns mounting, all eyes are on the upcoming RBI monetary policy review later this week.

Implications of a Weak Rupee

The Downside:

• Rising Import Costs & Inflation: A weaker rupee makes imports, particularly crude oil, more expensive, increasing production costs and leading to inflationary pressures.
• Higher Loan Servicing Costs: Companies with foreign currency loans face a higher debt burden, impacting balance sheets and investment outlook.
• Capital Flight & FDI Concerns: A depreciating rupee may trigger capital outflows, discouraging foreign direct investment (FDI) and leading to economic volatility.
• Consumer Sentiment Impact: Reduced purchasing power and costlier imports could affect demand and economic growth.

The Upside:

• Boost for Exporters: A weaker rupee enhances export competitiveness, benefiting industries like IT, pharmaceuticals, and textiles.
• Stronger Remittances: Indians abroad gain from better exchange rates, leading to higher inward remittances, which support domestic consumption.
• Government’s Focus on Self-Reliance: India can enhance its competitive advantages rather than rely on exchange rate adjustments to boost trade.

Conclusion

• The rupee depreciation reflects a mix of global economic shifts, trade tensions, and domestic policy challenges. 
• While it poses risks, India’s long-term economic resilience, export sector growth, and government reforms could help navigate the crisis. As the global trade war escalates, India’s strategic economic measures will be pivotal in determining how the rupee stabilizes in the coming months.

Source: IE