New Delhi: Global shocks plunged the Indian rupee to a record new low Thursday, as worries of runaway inflation mount. A falling rupee increases inflation by making imports costlier, which is likely to put more pressure on the Reserve Bank of India (RBI) to stem the currency’s sliding value.
The rupee fell 0.5% to 77.6313 per dollar on Thursday. That’s a new record low for the second time in a week. The rupee gained marginally thereafter as the central bank stepped in with some measures. Stocks tumbled too as the benchmark Sensex Index fell 1.8%, a two-month low.
A volatile rupee that keeps falling frequently certainly isn’t good for the economy. Simply put, a weaker rupee increases inflation. Headline inflation in March stood at 6.95%, coming in above the RBI’s comfort level of 6% for a third consecutive month. India’s key imports – oil, edible oil, and a range of other non-farm commodities – will all get expensive. Ultimately, it will mean your household budget gets tighter and you pay more for everything, from transport, and mobile phones to food items.
Why does the rupee rise and fall? If one rupee buys more dollars than it did before, that means the rupee has become stronger. If the same rupee is worth less dollars, its value is said to have fallen.
Like any market, the money market, too, works on the principle of demand and supply. If there’s more demand for dollars vis-à-vis the rupee, the rupee depreciates and vice versa. That’s how the floating exchange rate works.
To stem the fall of the rupee, the basic intervention that RBI, as the central bank, can initiate is to sell dollars to reduce its demand, thereby strengthening the rupee.
The RBI sold more dollars on Thursday, according to most analysts, from its $600 billion forex reserves.
“USD-INR spot touched a fresh all-time high of 77.62, after higher-than-expected inflation print in the US pushed US Dollar Index to a fresh 20-year high. Weakness in equities was an add-on force for the US Dollar. We suspect RBI may have sold dollars to stem the decline in the Indian Rupee. Overall view is of a range, between 77.20 and 78.20 on spot,” said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.
The rupee’s fall is primarily because investors are selling off rupee-based investments for dollar-based ones, triggering a rupee fall.
Reversal of easy money policy by the US Fed, or low-interest rates being reversed to higher interest rates, Russia’s invasion of Ukraine that have created global disruptions, China’s Covid measures leading to a weakening of the Yuan have all had varying degrees of impact on the rupee.
A weak rupee does help exports from India. How? The same rupee fetches more dollars for every rupee worth of goods exported. However, India is a net importer of goods, meaning exports minus imports show that India imports far more than it exports. A weak rupee – whose buying power is low – makes imports costlier. That considerably adds to inflationary pressure. So, the RBI ties to maintain the rupee at a convenient value level: not too strong, nor weak. That’s the goal. But doesn’t necessarily mean things will work exactly like that in the real world.
The RBI raised the repo rate by 40 basis points to 4.49%, Governor Shaktikanta Das announced last Wednesday. The move indicates a clear turn by the central bank towards taming rising inflation in the country.
The repo rate refers to the rate at which commercial banks borrow money by selling their securities to the RBI, while the reverse repo rate is the rate at which the central bank borrows money.
These rates are key to boosting credit and investments by businesses in the economy as India’s pushes its nascent economic recovery.