The movement in markets determines the price of the commodities, which in turn determines the growth rate. While this is a basic understanding of the buy and sell mechanism, various factors impact the prices. Recently, Indian Rupee declined to around 82 during the first week of October, which further declined to 83 by October 20.
Hitting an all-time low for the year 2022, the depreciation in the Indian rupee is recorded at 8.9%, which has raised various concerns for the government, businesses, and the economy. To combat the volatility in the market, RBI, the apex banking institution of India, has worked out the Forex reserves at quite a rapid pace while ensuring an appropriate level of intervention in the process.
The Lowest Touch Point
According to a regional daily Business Line report, India’s foreign exchange reserves were depleted the fastest of all emerging nations as the RBI sold dollars to stop the rupee’s decline. Since September 16, India’s reserves have decreased by 13.88% in 2022, from 633.6 billion to 545.6 billion US dollars.
Additionally, the rupee was valued by Bloomberg at 83.0925 to the dollar after initially trading at 82.9825 and a new record low of 83.1212 on October 20, 2022.
Reasons For Rupee Falling
According to Reuters, there was a sell-off in the currency during the final 1.5 hours of trading on Wednesday, October 19, because of substantial corporate dollar and custodian outflows. While this has been quite unexpected, there are still various reasons that you can link to the fall.
To start with, the Ukraine crisis is a major one causing an imbalance in the economies globally. Rising prices of oil and rising interest rates by the US Federal Reserve have led investors to sell Indian stocks and invest in foreign stocks, which is a major reason for this depreciation. At the same time, inflation has changed investors’ outlook and made them more inclined towards international assets for investments owing to better profits and returns.
Another major reason for the falling rupee value is the value of imports and exports. Trade deficit implies that the consumption of the goods produced outside India is more than the sale of goods produced in india. This led to a fall in the value of the India rupee as the rate of imports rose rapidly compared to exports. India exported 192.59 billion US dollars worth of goods from April to August while importing 317.81 billion US dollars during that period, according to the federal ministry of commerce and industry.
A clear trade deficit in this scenario made the rupee weaker. It also pressured the GDP, which remained below the expected growth rate.
Why is Falling Rupee a Major Concern?
The fall in the value of the rupee is a major concern and is mainly associated with the prices of commodities and the purchasing power of the residents. A fall in the value of the rupee signifies that individuals, companies, and the government are required to pay a higher amount for goods. This can be understood as the number of goods a person could buy with a rupee in hand has now decreased due to a fall in the value of the rupee.
This causes inflation which increases the price of the raw material and even the import of finished goods, ultimately raising the price for the entire production channel. The domestic market starts to face a crunch for money, which decreases the power of people to buy goods with their existing income.
The best example to understand this is the fuel prices. The fuel price is estimated to be increased around 70 times, and a total hike of 80% has been recorded. This increased the cost of the linked services like transport, production, and even goods. The ultimate impact of a fuel price rise is inflation. Now, if the price of crude oil continues to increase, there will be a rise in the price of fuel which will further reduce the Indian rupee value.
This cycle is going to impact the domestic market both directly and indirectly.
Import Sector Is Facing Major Issue
The import sector is facing a major issue in the current situation where the Indian rupee is falling rapidly. The sectors like automotive, electronics, hardware and other segments are highly dependent on imports, and the price is expected to rise in this segment. The biggest concern over here is that all these sectors are connected to the rest of the manufacturing and service sectors, and the impact of the price rise here is also going to be experienced by others.
Additionally, the price of [precious metals and commodities like gold, silver, steel, copper, coal, and others are linked to their valuation in the international market. The price of such commodities is also expected to rise.
Role Of Authorities
The Indian government and Reserve Bank of India take the necessary steps to stop the depreciation of the Indian rupee if there is a significant dip in its value. Some of the common control methods implied are:
- Restricting importation of non-essential items or raising import taxes on them.
- Gold deposits may be raised to balance currency rates.
- Encouraging foreign direct investment to boost capital inflow.
A currency’s value and performance significantly influence its economy; when a currency does well, so does the economy, and vice versa. Because of the nation’s rising inflation rate, a decline in the value of the Indian Rupee negatively impacts the economy. However, a decline in the currency’s value boosts a country’s exports by making them more affordable for international consumers. Still, there is a significant decline in worldwide demand in the current environment.
Overall, a fall in the value of the Indian rupee is not beneficial for the industrial sector, which in turn will negatively impact the overall linked sectors and the individual. While this fall in the Indian rupee is quite drastic, owing to the market conditions and the expectation, there are chances that a more rupee might be observed in the upcoming months.