Indian Rupee Depreciation Against Dollar

Table of Contents

Context: Indian Rupee Depreciated by around 10 per cent against the US dollar in 2022. Read the article to know more about the Indian Ruppe Depreciation Against Dollar

Indian Rupee Depreciation Against Dollar

Indian Rupee fell to a lifetime low of 83.2 against the dollar.
Indian Rupee was the worst-performing Asian currency in 2022, witnessing a fall of around 10 per cent
- During the year, Chinese Yuan, Philippine Peso and Indonesian Rupiah fell around 9 per cent.
- South Korean Won and Malaysian Ringgit declined by nearly 7 per cent and 6 per cent, respectively.
RBI Intervention: Since the beginning of 2022, India’s foreign exchange reserves have fallen by $70 billion to check the downfall of Rupee.
- As of December 23, 2022, it stood at $562.81 billion.

Factor’s Contributing to Indian Rupee Depreciation Rate

Appreciation of US Dollar: Appreciation in the US currency on safe haven appeal amid fears of recession.
- In 2022, foreign portfolio investors (FPIs) pulled out Rs 1.34 lakh crore from the Indian markets – the highest-ever yearly net outflow.
- They withdrew Rs 1.21 lakh crore from the stock markets and Rs 16,682 crore from the debt market in 2022, putting pressure on the rupee.
Interest Rate Hike: US Fed aggressively raised interest rates by 425 basis point (bps) in 2022 in its fight against inflation.
- This led to a higher interest rate differential between the US and India, and investors pulled out money from the domestic market and started investing in the US market to take advantage of higher rates.

Recession in EU market: EU markets are witnessing a recession due to the Russia-Ukraine war. Investors are leaving EU markets and investing in US dollar-dominated assets.
Russia-Ukraine war: It has accentuated the FPI withdrawals with the global economic slowdown making inflows tougher.
Rising crude prices in the international markets and risk-averse sentiment among investors weighed on the local currency.

Implications of Indian Rupee Falling Against Dollar

Advantages

Disadvantages

Boost exports: The weakening of the rupee makes some exports more viable as a result of competitive price. However, input raw materials become costlier.
Discourage imports: The higher price of imported goods will discourage imports, which in turn helps with reducing the build-up of external debt.

Inflation: Indian economy is heavily dependent on imports for commodities such as oil and gold.
Increase in fuel prices is expected to increase inflation in the country.
Debt payments: The servicing of sovereign debts will be more costly as the value of dollars has increased.
Decline in foreign investments: Foreign investors will reduce investments in the country as their profits will decline as a result of currency depreciation.

Indian Rupee Depreciation 2023 Conclusion

Bleak Global Forecast: Supply chain disruptions and food inflation are expected to extend from 2022 into 2023.
- Russia-Ukraine conflict has failed to reach any solution and any possibilities of a truce look rather remote in foreseeable future.
- Resurgence of COVID-19 may plague the markets.
- Most global institutions such as the IMF and the World Bank have revised global growth forecasts lower for 2023 due to slowdown in world’s three largest economies – US, China and the Eurozone.
Silver lining For India: India’s GDP is forecast to expand by 6.8% in 2023. Since India is expected to grow at the fastest pace, the second half of 2023 may be positive for the domestic currency.
- Although the outlook on the rupee remains weak in the near future, the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy.

Way Forward

Diversifying currency: Over-dependency on US dollars for international transactions needs to stop. This will reduce impact of volatile US dollars on emerging economies.
Foreign exchange intervention: Many countries are indulging in foreign exchange intervention to prevent further slide in their domestic currency.
- This includes selling dollars and buying their own currencies to strengthen its position.
Currency resilience: Emerging countries must stockpile dollar reserves, which will act as buffer against external currency shocks.
Currency swap: Developed countries could activate currency swap lines to eligible countries. This will act as an important safety valve in times of currency market stress.