How the rupee plunge impacts the economy
The rupee has fallen to a new low of 83.5 against the dollar. This has wide ramifications, making exports lucrative but imports expensive. Mint looks at why the domestic currency is falling, how it impacts everybody and what the RBI can do about it.
By how much has the rupee depreciated?
The value of the rupee fell to an all-time closing low of 83.54 against the dollar on Tuesday. It had gone even lower at 83.57 during intra-day trade but likely intervention by the Reserve Bank of India prevented a further slide. It ended with a 9 paise or 0.10% depreciation and was still one of the better performing currencies among Asian economies. The Indonesian Rupiah depreciated 2%, Taiwanese dollar 0.34%, South Korean won 0.76%, the yen 0.28%, Thai baht 0.21% and yuan 0.18%. In the mid-term however, the rupee has now depreciated by over 9% in the last 2 years (see table). This is steeper than the long-term trend.
Can’t the central bank do something?
The value of a currency is a factor of demand and supply which depends on the overall attractiveness of a country as an investment destination. The rupee’s value goes up if foreign investors flock to either set up manufacturing units (FDI), invest in the markets and companies (FII) or if exports rise. If the value of the rupee drops alarmingly, the RBI can intervene by selling dollars from its foreign exchange kitty or raise interest rates to try and compete with the US Fed and provide good returns to investors.
What are the reasons for the fall?
Geopolitical instability has a major impact on investors which, in turn, sets in motion a chain reaction ultimately affecting the value of a currency. The Iran-Israel conflict on top of the prevailing IsraelPalestine and Russia-Ukraine wars, could potentially disrupt global supply chains, leading to an increase in the prices of commodities, fuelling inflation. This in turn diminishes the chances of an interest rate cut by the US Fed—central banks raise interest rates to curb consumer spending. Higher rates in the US encourage investors to move money from different parts of the world, including India, to the US.
How does it affect the Indian economy?
A weaker rupee makes imports expensive while it benefits exporters. Since India is a net importer of goods and services—it has a current account deficit of $9.2 billion in the first half of 2023-24—a fall in the rupee hits a host of products from electronics and machinery to plastics and chemicals. A more direct impact is on oil prices.
Are things likely to get better?
The rupee’s fall coincides with India sitting on record foreign exchange reserves of $648.56 billion. They rose by $2.98 million in the week ending 5 April and have now grown for 7 consecutive weeks. This gives the RBI significant headroom to splurge. On Tuesday it intervened to sell dollars worth an estimated $100200 million to prevent the rupee from sliding further. It had done the same in 2022 following the Ukraine war and the US Fed raising rates. Experts expect RBI to intervene to stem a further fall.