InvestorQ : Why has the Indian rupee fallen so sharply till date?
indhumathi Sayani made post

Why has the Indian rupee fallen so sharply till date?

1 month ago

Actually, there are several reasons for the sharp fall in the rupee. It has weakened from around 76/$ to around 82/$ in a short span of time. Here are the main issues.

· During the previous week, the rupee had weakened sharply to very near the 82/$ mark. The concern is over the speed of the fall and the fall has been really rapid ever since the Fed hiked its rates by 75 basis points.

· Another factor that is roiling the rupee is that the US economy has shown two quarters of negative growth, contracting 1.6% in the March quarter and then contracting by 0.9% in the June quarter.

· While the dollar has the exorbitant privilege of being the currency of choice for world trade and commerce, India does not have that kind of privilege. Hence raising rates does not necessarily strengthen the rupee, unlike the dollar.

· The RBI has been a lot more cautious about intervening and supporting the rupee. For now, the rupee is holding the 82/$ levels, but it is anybody’s guess, as to how long it can hold on to these levels. After all, the key issue is not just the rupee weakness but the strength of the dollar too.

· Incidentally, the US dollar has strengthened across all key currencies in the world and the Indian rupee is no exception. However, there are also other fundamental factors that are putting pressure on the Indian rupee.

· One big issue that is putting pressure on the Indian rupee is the rising deficit on the merchandise trade account. Remember, this is not due to higher import volumes but due to steep spike in the prices of commodities. In such cases, the weak rupee only worsens the situation with imported inflation.

· One has to just look at the numbers to understand this point. India runs a monthly trade deficit of $30 billion and weak rupee just magnifies this more. It just adds up to the oil import bill, which is half the trade deficit.

· The other issue is that portfolio flows are also weakening. FPIs sold $34 billion of equities between October 2021 and June 2022. There was some reversal in August 2022 with FPI buying of $6.44 billion, but that reversed to selling of close to $1 billion in September.

· With FPIs not supporting the rupee with flows, India appears to have lost the biggest technical support base for the rupee and made the Indian rupee extremely vulnerable to global headwinds.

· Finally, there are concerns that Indian debt may not be added to the indices in 2022. So billions of dollars that flowed into Indian bonds in anticipation may just be waiting to move out. That is not a great feeling.