Indian Rupee Falls to Lowest Level Against US Dollar: Why Is This Happening?

The Indian rupee recently reached an all-time low against the US dollar, sparking concerns among economists, businesses, and consumers. This decline can significantly affect the economy, influencing imports, inflation, and more. But what’s driving the rupee’s depreciation? Let’s examine the main factors behind this trend.

The Indian rupee dropped to a record low of 85.10 against the US dollar on Friday. This happened because the dollar stayed strong, boosted by solid US economic data that supported the Federal Reserve’s strict policies.

The rupee exceeded its previous low of 85.0850 on Thursday 19^th December 2024 and settled at 85.10.

Is RBI Intervention Enough to Shield the Rupee from Persistent Pressure?

State-run banks were reportedly active in the currency market, selling dollars, likely on behalf of the Reserve Bank of India (RBI). This strategic intervention aimed to curb the rupee’s depreciation and stabilize the exchange rate amid volatile market conditions. The RBI’s move reflects its ongoing efforts to maintain economic stability and counter excessive currency fluctuations.

However, despite this measure, the rupee continued to face downward pressure. Contributing factors included rising crude oil prices, a widening trade deficit, and persistent outflows of foreign investments. Additionally, global economic uncertainties, such as tightening monetary policies by major central banks and geopolitical tensions, further exacerbated the situation. These combined challenges have highlighted the complexity of safeguarding the rupee’s value in a turbulent economic environment.

What Factors Are Driving the Steady Decline in Price Over Time?

The graph highlights a consistent decline in prices over time, which can be linked to multiple factors. Economic challenges such as reduced demand, supply chain issues, or shifts in market sentiment may have driven this downward trend. External influences, including global commodity price fluctuations, currency depreciation, or geopolitical tensions, could have further impacted prices. Moreover, policy changes, adjustments in interest rates, or waning investor confidence might have also contributed to the decline. Analyzing the combined effects of these factors is crucial to uncovering the underlying causes and devising strategies to stabilize prices.

Reasons behind the decline of the Indian Rupee

1. India’s slowing economic growth, which recently hit a seven-quarter low, and a widened merchandise trade deficit have raised alarm among investors. Adding to this, the US Federal Reserve’s projection of fewer rate cuts in 2025, driven by persistent inflation, has bolstered the US dollar, increasing the vulnerability of emerging market currencies like the rupee.
2. Kunal Sodhani, Vice President at Shinhan Bank India, noted that the higher trade deficit combined with sluggish growth puts pressure on the rupee, especially with outflows from domestic equity markets. He added that the USD/INR rate now finds a base around 84.70, with the potential to reach 85.50 levels.
3. The dollar index recently hovered near a two-year high of 108.4, fueled by stronger-than-expected US GDP growth and a notable drop in weekly jobless claims, reflecting optimism about the US economy. Foreign investors have also exacerbated the rupee’s decline, offloading nearly $500 million worth of Indian equities on Thursday.
4. Despite these pressures, the Reserve Bank of India (RBI) has regularly intervened, helping to keep the rupee’s volatility in check compared to other Asian currencies. All eyes are now on the US core personal consumption expenditure (PCE) inflation data, the Federal Reserve’s preferred inflation measure, which is set to release later on Friday and could further influence global currency movements.

Final Thoughts

The rupee’s decline to a record low against the US dollar is caused by a combination of global and local factors. While some of these factors are out of India’s control, others, like controlling inflation and reducing the trade deficit, can be tackled with the right policies. As the situation develops, it is crucial for the government and the Reserve Bank of India to keep an eye on these trends and take the necessary steps to stabilize the currency and safeguard the economy.

Sources: msn.com