The Indian rupee is at an all-time low of around 77.5 per USD mark for the first time along with increasing crude oil prices. RBI has been aggressive in its intervention in the foreign exchange to protect the Indian rupee, this has resulted in foreign exchange reserves coming down to below $600 billion from its all-time high of $642. So, Let’s discuss what are the prime reasons behind the depreciation of the Indian Rupee against the US Dollar in this article as we move ahead.
Reasons for Rupee at All-Time Low:
- Foreign portfolio investors are withdrawing money from the market, almost Rs. 1.5 lakh crore outflow by foreign investor portfolio in rupees term and they converting this into the dollar. Hence, the demand for the dollar is increasing.
- Crude oil demand of India is fulfilled by imports and payments made in terms of the dollar, in a short duration the price of crude oil has been increased by 60%, and simultaneously demand the dollar is also increased by 60%.
- RBI has been aggressive in its intervention in the foreign exchange market and protecting the dollar levels. Forex Reserve with RBI is going down from almost $630-$640 bn to now less than $600bn.
- All these are for the short term, things will change. The foreign portfolio will make investments also but it has some long-term effects also which is a matter of concern.
Long term Reasons:
- Suppose you have 2 government securities one is giving the return of 3.17% and another is giving the return of 7.46%, A rational person will choose 7.46% because of the high yield. India’s G-Sec is 7.46% while 3.17% is of US G-Sec
- Normally 7.46% minus 3%, 4.29% is the rate by which on average the currency with a high G-sec yield will depreciate every year if things do not change over time.
- It can be controlled if the interest rate of Indian G-sec goes down or the interest rate of US G-sec goes up. When the interest rate of both the countries’ government securities will match then the depreciation of the Indian currency will be stopped.
- When there is Inflation in both countries, so the difference between their inflation rate will be the rate by which currency will start depreciating.
What Should Individuals Do?
Reserve Bank of India will be able to control the depreciation of the rupee in terms of the dollar, as it has already done some intervention and will intervene again, and hence for the short term, things will change.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.