The rupee continues to trade lower against the greenback; What’s next?
Indian rupee ended at a fresh record low
The Indian rupee closed the day on Wednesday at a new record low concerning the US dollar.
The USD/INR climbs above 83 for the first time in history as the unrelenting decline in the Indian rupee’s value relative to the United States dollar continues. This is a worrying development for the nation and might leave the Indian economy severely damaged. In comparison to Tuesday’s close of 82.36, the local currency had opened marginally higher at 82.33. It increased during the day by as much as 0.05% before losing all those profits and dropping as much as 0.78% to achieve a new low of 83. At closing, the rupee was down 0.76%, trading at 82.98.
According to analysts, there have been unconfirmed reports of stop losses being activated for some foreign banks and nationalized banks purchasing dollars on behalf of oil PSUs. Ritesh Bhansali, vice president of Mecklai Financial Services Ltd., stated there is “a considerable likelihood” of the central bank interfering at 83-odd levels. “It appeared ominous that the RBI might have made a futures market intervention yesterday (Tuesday). On short positions, stop losses were hit at 82.4 to 82.5. At the same time, oil and imports showed strong purchasing “Anil Bhansali, head of treasury at Finrex Treasury Advisors Ltd. “82.4 should be a support with higher levels of 83.5 soon forecast”.
Reasons For Rupee Depreciation
It is well recognized that the demand for the US dollar is more closely linked to the devaluation of the rupee than domestic problems. However, the rate at which the devaluation is occurring could seriously cause major economic concerns.
The Rise in Crude Oil
Everyone knows that about 85% of India’s crude oil needs are imported, and as the currency declines, our import costs will increase. Even if their prices remain stable, not just crude oil imports but all imports, in general, will increase in cost.
A strong dollar and a weak rupee go hand in hand. The value of the rupee decreases as dollar demand rises.
Currency valuation is impacted immediately by a growing trade deficit. Since imports are more expensive than exports, money will leave the country, devaluing the rupee.
The Exodus of Capital
Rupees are converted into US dollars to exit the Indian market. As a result, the dollar will be stronger against the rupee.
Dropping Indian Rupee Causes of Dollar Appreciation
Better performance of the US economy
It is doing better than other economies on a fundamental level. Despite increasing inflation, the US job market is performing quite well, especially in the service sector. Because of this, the market is now more confident.
The Rise In Interest Rates
The US Federal Reserve is boosting interest rates. US government bonds, among the safest investment options, have been drawn in. The US Fed’s interest rates will likely increase further due to US inflation. This will cause global currencies, particularly the Indian rupee, to continue to fall.
The dollar is regarded by many investors as the safest asset to own when the stock and bond markets become erratic. Because of this, there is more demand for dollars, raising their value.
The Market Decline in the EU
Because of the Russia-Ukraine conflict, EU markets are in a slump. Investors are shifting away from EU markets to assets controlled by the US currency.
Consequences of the Indian Rupee’s Decline
Some exports are now more viable due to competitive pricing brought on by the rupee’s decline. However, the price of input raw materials rises.
The greater cost of imported items will deter imports, which helps slow foreign debt growth.
India’s economy relies heavily on imports of goods like gold and oil. The nation will be required to pay more rupees to get the goods because prices have been set in US dollars. Inflation in the nation is anticipated to rise as fuel prices rise. A 10% increase in the dollar price will result in a wage growth increase of 1%.
The rising dollar’s worth means servicing sovereign obligations will cost more money. The private and government entities must pay back extra rupees for the same quantity of dollars.
Foreign Investment Decline:
As their profits fall due to currency devaluation, international investors will decrease their national investments. This will affect emerging economies like India’s long-term growth. Although many forex brokers in India offer currency pairs without the INR as their base currency, which are therefore ineligible for trading, cross currencies with the INR are a must for a foreign broker.
Steps can be taken to combat the strong dollar
Changing the currency:
There should be less reliance on US currency for foreign trade. This will lessen the effect of the unstable US dollar on developing economies.
Intervention with the foreign exchange:
Numerous nations are engaging in foreign exchange interventions to stop the decline of their national currency.
This includes selling dollars and purchasing its native currencies to improve its position.
Emerging nations must keep a reserve of dollars on hand to protect them from foreign exchange shocks.
Activating currency exchange lines to qualified nations was possible from developed nations. This will serve as a crucial safety valve in stressful times in the financial market.