Share Market Up, Why is Rupee Weak?
You must have heard the news that recently the Indian Rupee has reached a record low against the US Dollar. This is surprising, especially because during the same period, the stock market has been trading around its all-time highs. Let's understand what's happening and how it could impact investors.
What's Happening?
According to NDTV, the decline of the Indian Rupee is showing no signs of stopping. On Friday, April 19, the Rupee opened at a record low of 83.5550 against the Dollar, surpassing the previous record of 83.5475. As of April 22, it was hovering around 83.43 against the Dollar. Is the tension between Iran and Israel the only reason for the Rupee's decline, or is there something else? Let's find out.
Why is Rupee Weakening? High Crude Oil Prices in the International Market:
India is a major importer of crude oil. Rising crude oil prices force India to spend more Dollars, leading to reduced demand for the Rupee and a decline in its value.
Impact of International Events:
Occasionally, geopolitical tensions or conflicts such as war can also affect the Rupee, as such situations lead to an increase in crude oil prices in the international market.
Strength in US Treasury Yields:
An increase in US Treasury yields makes investment in the US market more attractive, thereby increasing demand for the Dollar and reducing the value of the Rupee.
How Much Has the Rupee Declined?
According to the Times of India, in the last 10 years, the US Dollar has strengthened, impacting the Indian Rupee. Compared to April 2014, the Dollar index increased by 33%. During the same period, the Rupee weakened by 39.4%, falling from Rs 59.9 to Rs 83.54 per Dollar. However, if we only consider 2024, the picture looks slightly different. Since January, the Dollar index has only increased by 3%, while the Rupee has weakened by only 0.36 Rupees.
Impact of Rupee's Decline on the Indian Economy
A weak Rupee has a mixed impact on the Indian economy: Increased Cost of Imports: As India is a net importer of goods and services, a weak Rupee can lead to higher import costs, resulting in increased prices for imported goods such as oil, electronics, plastics, chemicals, and machinery, potentially leading to inflation. Boost to Exports: With a weak Rupee, Indian products become cheaper in foreign markets, which can boost exports, thus benefiting the economy.
What’s Next?
According to the Financial Express, the Rupee may remain weak in the coming times due to global geopolitical instability. Additionally, concerns about delayed cuts in US interest rates due to strong US Treasury yields could put pressure on the Rupee.
However, the relief is that the Reserve Bank of India (RBI) holds a strong foreign exchange reserve of $648.6 billion as of the week ending April 5, providing confidence that there won't be significant fluctuations in the Rupee in the near future.
Teji Mandi (TM Investment Technologies Pvt Ltd) is a SEBI registered Research Analyst (RA). Information in this article should not be construed as investment advice. Please visit www.tejimandi.com to know more.