The Indian rupee has plunged past the 86-per-dollar mark to a record low of 86.68, raising concerns over India's economic outlook. This sharp decline reflects growing challenges for the country, amid a strengthening US dollar fueled by positive US economic data and anticipation of Donald Trump’s presidency. The rupee's steepest fall in nearly two years is driven by several key factors:
Strong US Dollar: The US dollar is strengthening because of a better economic outlook in the US and higher interest rates there. This makes US assets more attractive to investors, pulling money away from countries like India.
Rising Oil Prices: Global oil prices are going up due to geopolitical tensions like the Russia Ukraine war and issues in the Middle East. Since India imports most of its oil, higher prices mean more dollars spent on imports, which weakens the rupee.
Foreign Portfolio Investor (FPI) Outflows: The Indian equity market has seen substantial outflows from FPIs, adding downward pressure on the currency. Global funds have pulled nearly $2 billion from Indian stocks this year, alongside significant withdrawals from fixed-income securities.
Central Bank Measures: The Reserve Bank of India (RBI) has intervened to manage rupee volatility, including dollar rupee swaps worth $3 billion to inject rupee liquidity. However, these interventions have tightened domestic liquidity, complicating the central bank’s monetary policy decisions.
Global Uncertainty: Concerns over the policies of the new US government and slower-than-expected company earnings growth in India have further dampened market sentiment. These factors, combined with doubts about the RBI’s ability to contain rupee volatility, have contributed to the currency’s slide.
Despite these challenges, the rupee is still one of the most stable currencies globally, with only a 3% drop against the dollar this year. Earlier in 2024, inflows from Indian bonds being added to global indices helped keep the rupee stable.
What’s Next?
The rupee’s decline presents challenges, reflecting broader global trends and external pressures. The RBI is likely to balance efforts to stabilize the currency with domestic economic priorities, especially as India navigates global uncertainties. This evolving situation underscores the impact of external factors, such as U.S. monetary policy and geopolitical developments, on the Indian rupee's trajectory. Given the rupee's consistent depreciation, it is expected to remain under pressure in 2025. The rupee may potentially weaken further, reaching a record low of 91 against the U.S. dollar.
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