THE CRISIS OF INDIAN RUPEE
Crisis of the Indian Rupee
When I am writing this, the rupee is at 79.51 against one dollar (12-07-2022).
In recent months, Rupee has depreciated around 5% - 6%, last time when
Covid hit the economy, the rupee depreciated just like that, around 6% to 7% (
Jan-01-2020 to Mar- 31-2020). Whenever you have heard of currency, one question
will definitely come to your mind why
do currencies fluctuate?
Every currency goes up and down because of the Supply and demand of that
currency, If the demand for the rupee increases in the market against the dollar,
the rupee will appreciate against the dollar and vice – versa.
Is the Indian rupee the only currency depreciating right now?
So as we can see in the charts all over the world many currencies
depreciated against the Dollar including both emerging currencies {Indian- Rupee,
Pak-Rupee, Lira} and Developed currencies {Euro, Pound, Japanese Yen, Chinese
Yuan} that is why US Dollar Index (DXI) hit its 20 years high. There are
many reasons for this massive depreciation in all currencies. But we will see
Only the Indian- Rupee closely.
WHY THE INDIAN- RUPEE IS CRYING:
MASSIVE OUTFLOWS OF FOREIGN INVESTORS:
Since September 2021 FIIs (Foreign Institutional Investors) are withdrawing their capital because of hawkish rate hikes by the FED (Federal Reserve). FED has increased its rates by 150bps (basis points), in addition, it will hike more interest rates in the future. When Interest Rates were slow (0.25%) Investors were putting money in the Indian Markets by borrowing at a lower rate and now when Fed is increasing the rates, it is becoming harder for investors to invest money in the market.
ROARING CRUDE OIL:
Before the Russia-Ukraine war, Crude Oil was going up and down in the range of 65-80 USD/Bbl, which was still very expensive as compared to the 5-year average. However, after the Russian – the Ukraine war, crude prices hit a multi-year high price. As India is not an export-led country, it imports around 85% - 87% of Crude oil for its needs. As Crude prices increase, it impacts our Current Account Deficit (CAD), which further impacts the Rupee value in the Forex Market.
RISING BOND YIELDS IN US
US 10 Year
Bond Yield has been increased by around 1% in recent months that’s why FIIs
(Foreign Institutional Investors) selling all over the world to invest in US Treasury.
Roaring Dollar
The dollar is
getting stronger day by day, for instance, DXY
(Dollar Index) hit its 20-year high of 108.50. The dollar is considered a safe
haven by investors all over the world. As the economy slows down Investors buy
dollars to protect their wealth. Whenever the Dollar gains its value, Rupee
depreciates.
Gold Imports:
India’s gold imports in May jumped 677 percent from a year ago to the
highest level in a year as a correction in prices just before a key festival and
wedding season boosted retail jewelry purchases, a government source said.
Higher imports by the world's second-biggest
bullion consumer could support benchmark prices, but the surge could increase India's trade deficit and
put pressure on the Rupee.
WHAT IS THE GOVERNMENT DOING?
Attracting Foreign Remittances:
The Reserve Bank
of India (RBI) recently relaxed the interest rate on foreign currency non-resident bank, or FCNR(B), and non-resident external (NRE) account deposits for the period from 7 July to 31
October. This move most probably increase
the foreign currency (or Attract the dollar) inflow in the economy, which will
help in protecting the rupee value. However, Some banks have increased rates
on FCNR(B) deposits by 10-110 bps to attract foreign deposits.
Increase Gold Import Duties:
The surge in
gold imports is putting pressure on the current account deficit. To curb import
of gold, customs duty has been increased
from present 10.75% to 15%,” the finance ministry said in a statement. It
will help to control the CAD.
Open Market Operations:
Forex swaps help in liquidity
management. It helps in currency rate checks. the central bank uses its
currency to buy another currency or vice versa. In a Dollar–Rupee buy/sell
swap, the central bank buys dollars (US dollars or USD) from banks in exchange
for Indian Rupees (INR) and immediately gets into an opposite deal with banks
promising to sell dollars at a later date.
RBI is selling billions of Dollar
Swaps to manage the Rupee-Dollar equation in the economy.
CONCLUSION:
India's foreign exchange reserves stand at $588.314 billion as of July 1, 2022. The
rupee fall will not impact the Indian economy as people think but still, it
impacts.
I think Government
should focus on tourism which will increase the dollar inflows. For
Instance, tourism has not recovered yet at the pre covid levels.
As there is a risk of recession in the US & UK, we can expect
lower demand for crude oil as compared to previous expectations, it will help in reducing crude oil prices
that will ultimately put less pressure on our CAD( current account deficit).
As India spent USD 119.2 billion in 2021-22 (April 2021 to March 2022), up from
USD 62.2 billion in the previous
fiscal year, according to data from the oil ministry's Petroleum Planning &
Analysis Cell (PPAC).
Thanks for reading this article.
Author: AMAAN AHMAD ANSARI
