How further will Rupee depreciate?
The Indian rupee is at an all-time low of 77.41 compared to the US dollar, surpassing the previous low of 76.98 in March. This is terrible news for the economy. Why? Because of inflation.
What’s Happening?
The falling rupee is the last thing our economy needs. Some of you might say - currency fluctuates, so what? Right! But this time it’s different. The world just came out of the pandemic, we are already running amok with inflation, and the RBI just hiked repo rates making everything more expensive.
Now, let me explain the backstory. During the pandemic, the US Fed had printed money to help people and the economy. This American money made its way to Indian markets, about $30 billion in 2021 via foreign investment. Now, the US is hiking interest rates to suck that liquidity to control inflation.
The RBI, during this time, built a forex treasure of $640 billion. In case the rupee depreciates steeply, the RBI will control the situation by selling some of these reserves. So, there’s still hope!
How Will It Impact Us?
Rupee depreciation will directly impact our spending. Oil imports could get costlier along with other imported goods. Banks will increase their lending rates making EMIs costlier. Depreciating the rupee will make cars, phones and other electronic items expensive. At last, equity markets would take a hard pill as foreign investors flock away from equities, pulling out their investments, which is currently happening to us.
Should This Concern You?
The rising COVID-19 cases in Shanghai have affected the Yen and the emerging markets, including us. Markets have viewed the Chinese governments 'zero-covid policy' as a major risk to global growth. The lockdown effects were seen as China's export growth slowed to single digits in April as the curbs halted factory production, disrupted supply chains and triggered a collapse in domestic demand. Any decision by the People’s Bank of China will improve sentiments, helping the Indian rupee too.
What Lies Ahead?
The RBI has sold some dollars in the spot market to protect the rupee. For instance, RBI’s forex reserves have already fallen by over $40 billion - to $597 billion. However, until the Ukraine-Russia war is over and COVID-19 cases ease in China, the rupee will remain volatile. It will be interesting to see how much forex will the RBI sell to protect the falling rupee.