Mon, 05 Dec 2022

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A multitude of factors, including the ongoing Ukraine crisis, the raising of interest rates by the U.S. Federal Reserve, and investors selling Indian stocks to buy foreign ones, are believed to be the reasons behind the falling rupee.

by Peerzada Arshad Hamid

NEW DELHI, Oct. 5 (Xinhua) -- Indian rupee has fallen to a record low against the U. S. dollar. The rupee declined last week against the U.S. dollar and is currently close to inching toward 82.

In 2022 so far, the rupee has depreciated 8.9 percent against the U.S. dollar.

India's central bank, the Reserve Bank of India (RBI), has burnt forex reserves at a dramatic pace this calendar year to prevent exchange rate volatility, an intervention aimed at defending the currency at a particular level.

According to a report in the local daily Business Line, as the RBI sold dollars to arrest the fall of the rupee, India's forex reserves depleted the most among all emerging economies. Since the beginning of 2022, India's reserves have fallen 13.88 percent from 633.6 billion U.S. dollars to 545.6 billion U.S. dollars as of Sept. 16.

WHY RUPEE IS FALLING

A multitude of factors, including the ongoing Ukraine crisis, the raising of interest rates by the U.S. Federal Reserve, investors selling Indian stocks to buy foreign ones, are believed to be the reasons behind the falling rupee.

Financial experts argue that as inflation rises across the world and domestic growth slows, investors usually look to sell their Indian assets and put the money into the U.S. markets for better safety and returns.

The rupee is falling against the dollar primarily because of the growing trade deficit that imports are increasing at a much higher pace than exports, they added.

According to the federal ministry of commerce and industry, India's merchandise export in April-August was 192.59 billion U.S. dollars, and merchandise imports in the same period was 317.81 billion U.S. dollars.

A weaker rupee makes imports more expensive, thus exerting a short-term negative effect on domestic production and GDP as a whole.

The increase in imports is mainly due to a sharp increase in oil prices following the Ukraine crisis. The increase in the import bill for coal and other essential commodities particularly raw materials has bloated the import bill.

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IMPACT OF WEAKENING RUPEE

The weakening of the rupee against the dollar is going to impact the Indian economy and ordinary citizens. The falling of the rupee signifies the depreciation of its value against the U.S. dollar, which broadly means the government, companies and citizens are forced to pay increasing amounts of money.

The depreciation of money is a direct indication of inflation.

As the price of the rupee falls, importing goods and raw materials becomes increasingly expensive, which then pushes up the prices in the domestic market.

India is the world's third-largest consumer of oil and imports over 80 percent of it from other countries to meet its needs. A weakening rupee puts pressure on the already high import prices of crude and raw materials, resulting in higher imported inflation.

With the increase in fuel prices, the prices of almost all the other goods and products sold in India also increase.

If the prices of crude oil continue to rise, there is a possibility that the falling of the rupee will continue. Thus, inflation in the country would continue to rise as well.

On the other hand, a stronger dollar means you need more of Indian currency to buy it than before.

The personal finances of the Indians get impacted both directly and indirectly by the falling of the rupee.

As India is predominantly an import-dependent nation, the consequences of a weak rupee are more severe. Imported goods become more expensive and therefore a weakening of the rupee is one factor contributing to rising inflation at present.

The prices of household goods are also expected to go up.

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IMPORT INDUSTRIES TO FEEL HEAT

In the given scenario, industries, where imports are a crucial component in the production segments, are likely to feel the heat. Industrial production costs are likely to increase in automotives, electronics, hardware and other segments where import dependency is high.

With the falling rupee, imports will become expensive while exports competitive. Regardless of what is imported, the prices of most of the commodities are linked to international prices. Prices of gold, silver, steel, copper, coal, energy and others will be affected.

In nutshell, a falling rupee is bad for industrial production.

Mohit Nigam, head of PMS at Hem Securities, said in an interview to a local newspaper that a higher dollar would make everything more expensive for traders, which would have a direct effect on the business climate in India.

"The rupee will be under pressure as the dollar index may significantly rise as a result of the U.S. Fed's commitment to raising rates in a more hawkish manner in the upcoming months, which may lead the rupee to fall further to 82 to 83.5 levels," Nigam said.

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