Record Fall of Indian Rupee

On May 9th Indian Rupee fell to its all-time low against the US Dollar, closing at 77.50 per USD.

Why did the value of the Indian Rupee fall?

  • Due to rising inflation, US Federal Reserve increased the interest rate. This led to the strengthening of the US Dollar.
  • There is a sustained outflow of capital from India, which also led to the depreciation of the rupee. The data from NSDL showed that so far in 2022, foreign portfolio investors (FPIs) sold more than Rs 1.3 lakh crore worth of Indian equities. Recently, India’s foreign exchange reserves also fell below $600 billion.

What is the impact of the depreciation of the Indian rupee?

  • Depreciation of the Indian rupee will give a boost to exports as exporters will get better value for their foreign shipments pegged to the US dollar.
  • Imports will become costlier. As India is a net importer, a depreciating rupee will worsen inflation. For example, India relies on imports to meet around 85% of its oil requirements. If the rupee depreciates, fuel will become costlier.

Which sectors will benefit?

Sectors like Information technology (IT), agriculture, textiles, and engineering goods will benefit from the decline in the Indian rupee, as they are most exported from India.

Which other major currencies weakened recently against the US dollar?

Chinese yuan and the Japanese yen also weakened recently against the US dollar.

What can RBI do to control further depreciation of the rupee?

To control the depreciation of the Indian rupee, the Reserve Bank of India (RBI) can sell dollars. The RBI can also use monetary policy tools, to influence the value of the Indian rupee.

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