In an open economy, currency depreciation has a significant impact on the entire global community. This problem becomes complicated as India spirals into a dollar-declined rupee, most of all due to rising international imports and inflation, leading to rising trade deficits. This trend is driven by a strengthening of the U.S. dollar, rising crude oil prices, and foreign investment inflows. The depreciation sends mixed signals for importers and companies that hold dollar-denominated debt; it benefits exporters and foreign direct investment opportunities. It’s important to understand the essence of the phenomenon to navigate the complex economic landscape better. Through this blog, let’s know the factors behind the decline in rupee value.
Understanding the Depreciation of the Rupee Against the US Dollar
Depreciation of currency simply means a decrease in the value of domestic currency with respect to the other foreign currency, usually Dollars. The exchange rate depends on the demand & supply of one currency against another. There are several domestic and international factors that cause currencies to lose value, like inflation differential, interest rates, demand for currency, political & economic stability, current account deficit, and public debt. The rupee has weakened over 1 year, with the rate falling from ₹63.52 to ₹85.06 in December 2024.
Key Causes of Rupee Depreciation
Strengthening of the dollar: Positive economic figures from America bolster the dollar, making it attractive for investment. This appreciation has a downward pressure on currencies aligned with emerging markets including the rupee.
Rising crude prices: India imports roughly 80 per cent of its crude oil, which it pays for in American dollars. In this manner, the rising global oil prices have the effect of raising the cost of imports and widening the trade deficit, which puts the rupee under further pressure. Global economic factors like the strength of the US dollar.
FII outflows: Concerns over the slowing growth rate of India’s economy combined with global uncertainties caused foreign investors to withdraw funds from Indian markets. The exit of capital reduces the demand for the rupee and has a hand in its depreciation.
Immediate Impact on the Indian Economy
Inflation: If the dollar is expensive to import goods, we will have to pay more in rupees, which naturally makes imports expensive.
Supply & Demand of Indian Assets: Foreigners can purchase more Indian assets like equities and bonds for investment, which increases the demand for the rupee, foreign reserves increase, and we can import more with this foreign reserve. So, the depreciation of the rupee might attract FDIs and FIIs.
Fuel Prices: Almost 85% of the oil requirement of India is fulfilled by imports. The weakening of INR has significantly increased the cost of oil imports.
Who is at a loss when rupees fall in India?
Indian importers – Import-heavy sectors like electronics, automobile, and FMCG. India buys a lot of essential goods like crude oil, for example, using dollars. In FY 2024, India spends $134 billion on oil imports. The rupee falls, the oil bill goes up, making petrol, fertilizers, etc., expensive, and that impacts the economy negatively, causing a trade deficit, causing a strain in your wallet, and the country, too, is falling rupee.
Companies borrowing in Dollar – The fall in the value of rupees impacts companies that have borrowed in $ from foreign institutions. This hurts the economy because in June 2024, India’s external debt was $682 billion, and now, without even doing anything, because of the depreciation of the rupee, the debt has also increased.
Who gains when the rupee falls?
Exporters – Companies that are export-oriented like IT services that offer services abroad and make money in dollars. The Pharma sector also benefits because many Indian drugs are sold in the US and Europe, and textile businesses gain too because exports are now becoming more attractive.
Government and RBI Measures
The Reserve Bank of India (RBI) has introduced a number of measures to curb rupee volatility. To combat excess demand, the RBI was involved in a slew of forex interventions, through which it sells dollars on the foreign exchange markets in the short run to stabilize the currency. Also, when the policy interest rate is adjusted, an increase in it can potentially attract foreign investments, thereby increasing forex inflows. Moreover, foreign exchange reserves management renders a country immune to instabilities arising due to fluctuations in the economic conditions globally.
The government policy measures might also be directed towards export incentives to redress the trade-in equitability. Schemes such as the Production Linked Incentives Scheme are designed to accentuate manufacturing and exports. The policies ensuing from ‘Make in India’ and Special Economic Zones (SEZs) are expected to further add to the export strength. The thrust of the diverse supply-side measures is to Improve the export base and reduce dependence on imports, mainly of crude oil and gold, as a means of narrowing this deficit.
Coping Strategies for Businesses and Individuals
Businesses and investors investing in foreign assets can mitigate currency risk using currency ETFs, entering into forward/future contracts, buying/selling currency options, entering into currency swaps or operational diversification.
Rupee depreciation is not all bad. Investors can still make money. There are many ways to take advantage of the rupee’s decline. Some of the ways include –
Allocate capital to foreign investments and reduce domestic exposure to take advantage of foreign currency appreciation.
Gold prices are priced in US dollars; therefore, they generally rise due to the rupee weakening. Investing in gold, sovereign gold bonds, or gold ETFs can help you gain.
The Road Ahead
There are chances of further strengthening of USD hence further weakening of EM currency index by 5% and INR by 7-10% and reach to 90-92 levels in 6-10 months. This may cause a long-term consequence for India’s global trade and worsen the government deficit. A decrease in rupee value is going to increase the import bills of goods like Edible oils, pulses, fertilizers, oil and gas. The other impact of rupee depreciation includes inflation going up as the import cost rises and subsequently dampens economic growth by creating upward pressure on interest rates.
Conclusion
While rupee depreciation creates challenges, it also opens an opportunity for the Indian economy: it increases import costs, affects sectors dependent on foreign borrowings, enhances the competitiveness of exports, and raises foreign investments. Interventions made by the RBI and government, like foreign exchange interventions, export incentives, and structural reforms, will effectively mitigate the effects of depreciation. For individuals and companies alike, mechanisms to adapt to the losses may include diversification of investments and selling gold. In the end, only adaptation to these dynamics will ensure resiliency among the varying ebb and flow of the global economy. For more information on trending stock market news or for those looking to invest with AI for a personalized stock portfolio or stock recommendations, visit Jarvis Invest.