THE SLUMP OF RUPEE

Indian rupee has continued to slump against the dollars. According to  International Monetary Fund (IMF), in the near future, the rupee may fall beyond the 94 rupees. 

India’s forex reserves have also dropped below $600 billion, reduced by more than $50 billion since September 2021, when forex reserves stood at an all-time high of $642 billion.

This drop in forex reserves is said to be taken place  due to the interventions made by the Reserve Bank of India, to bring the rupee to its natural value. 

However according to RBI officials, the drop in forex reserves is due to a fall in the dollar value of assets held as reserves by the RBI.

To avoid the market rate volatility , RBI looks to reach to a natural value of rupees. RBI issued directives to the state run bank to sell dollars in the open market in the exchange of rupees, so as to increase the demand of rupees. 

The value of the currency is determined by its demand & supply. When the supply of the currency increases its value decreases. While the increase in demand, increases its value.

The value of the rupees in the forex market, is determined by the import volume & foreign assets. If the volume of oil import is high, the supply of rupees in forex market will be more and will result in the drop in its value. 

The value of rupees increases, if foreign demand of Indian export increases and if there is increase in other domestic assets which increases the demand of rupees in the forex market. 

So whenever foreign investment increases in India, the supply of dollar increases in forex market. Which causes the rupee’s value to rise against the dollar. 

It is the function of the Reserve Bank to determine the supply of currencies. While the demand for currencies depends on the amount of goods and services produced in the economy.

Recently, U.S. Federal Reserve has been raising its benchmark interest rate causing investors to pull away their capital from emerging markets like India , seeking higher returns. 

This resulted into depreciation of other dominant currencies like Euro and Yen. 

Due to this withdrawal of dollar investments and increased compulsory imports like petroleum , India’s current account deficit may hit it's widest number. 

Due to prevalence of long term inflation in India, since several decades, causing the depreciation of rupees against the dollars. 

Due to higher inflation, RBI is creating rupees at a faster rates, than the US federal reserves creates the dollars. So rupee may continue to depreciate against the dollar because of the differences in long-run inflation between India and the U.S.

RBI has recently raised the rates to deal with problem of inflation and shifted on tightening the liquidity.

The interest rates across the world are increased and all central banks are shifted on tightening their liquidities , because of which threat of global recession is mounting on the global economy. 

In last couple of years the yield on the treasury bonds in U.S. increased and that resulted into the increasing investments in U.S. and withdrawing from emerging economies lead to scanty supply of dollars in all these economies lead to strengthening of dollar against the currencies of emerging economies. 

Federal reserves adopted a tighter policy by tightening money supply and availability of dollars in international market lead to increase in scarcity of dollars. 

The depreciation of the rupee is also due to a fundamental change in investor attitude to the rupee for the worse. So it reflects a fall in the rupee’s real purchasing power.

Investors have also been worried about the government’s rising fiscal deficit. A burgeoning fiscal deficit raises the risk of the Reserve Bank of India printing rupees to fund the expenses of the government, thus weakening the rupee.

Historically strong currencies such as the pound and the euro have also depreciated by more than 11%. Several Asian currencies such as the Korean won, the Philippine peso, and the Thai baht have weakened by more than 10% this year. 

Meanwhile, the dollar index, which gauges the dollar’s strength against six major currencies, rose to a 20-year high.

So far, in 2022, foreign portfolio investors have dumped Indian equities worth a net amount of $28.4 billion, more than double the $11.9 billion worth of equities sold during the global financial crisis of 2008.

Amid a weakening rupee and rising crude and commodity prices since the war in Ukraine, imports have become costlier. This has further widened the trade deficit that peaked at a record high of $26.18 billion in June 2022. 

While exports rose by 23%, imports jumped by 58% in June.

In the first quarter of FY23, the trade deficit ballooned to $70 billion compared with $31 billion in FY22. 

In FY22, India incurred a Current Account Deficit of $38.7 billion, or 1.2% of the GDP. It is expected to rise further. 

Weak currency bodes well for exports as it makes them more competitive. However, exports are also dependent on global demand which has been slowing. 

India’s imports expanded primarily on account of crude, coal, fertilizers and gold which make up almost half of India’s import bill. 

So even though prices of these goods remained elevated, rigid demand in India inflated the import bill. 

With the fifth largest forex reserves, RBI is well positioned to defend the rupee against undue volatility. 

The Reserve Bank of India  had tried to strengthen the rupee by spending about $40 billion but the fall of rupee is continued. 

The basket of Indian imports includes crude oil, coal, plastic material, chemicals, electronic goods, vegetable oil, fertilizers, machinery, gold, pearls, precious and semi-precious stones, and iron and steel.

The rupee losing value against the U.S. dollar would mean foreign education just became more expensive. 

As per the latest data, the country's imports expanded by 57.55% to $66.31 billion 

The merchandise trade deficit in June 2022 was estimated at $26.18 billion against $9.60 billion in June 2021, which is an increase of 172.72%. 

Crude oil imports in June almost doubled to $21.3 billion. Coal and coke imports more than doubled to $6.76 billion in the month against $1.88 billion in June 2021. 

Imports of vegetable oils stood at USD 1.81 billion in June this year, up 26.52 per cent over the same month in 2021.

In the case of fertilizers, the government subsidy bill is estimated to rise to ₹2.5 lakh crore in this fiscal against ₹1.62 lakh crore in the previous year due to the high prices of key farm ingredients in the global markets coupled with the rupee depreciation.

Prices of imported intermediate goods will go up and that will push manufacturing cost of businesses, that cost will be passed on to the consumers, which would push the price of goods.

Depreciation will push inflation in electronics goods . Already because of supply chain shock in China, electronic components, especially controllers/IC, prices are almost triple in the past two years and because of fast rupee depreciation, the prices of all imported components will further rise.