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Rupee near record low (91/dollar) but SBI Research forecasts H2 rebound after current depreciation phase.
Summary
The Indian Rupee recently approached a record low, nearing 91 per US dollar, driven by factors like geopolitics, tariffs, and capital outflows. SBI Research suggests the currency is in a late-stage weakening phase, with a potential rebound projected for the second half of the next fiscal year. This highlights key economic indicators and currency dynamics crucial for competitive exam aspirants to understand macroeconomic trends and their impact.
Key Points
- 1The Indian Rupee recently slid to near a record low of 91 per US dollar.
- 2SBI Research analysis suggests the Rupee is nearing the end of its depreciation cycle.
- 3Key drivers for the currency's weakening include geopolitics, tariffs, and capital outflows.
- 4The Indian currency is currently described as being in a 'late-stage weakening phase'.
- 5A potential rebound for the Rupee is projected for the second half (H2) of the next fiscal year.
In-Depth Analysis
The recent weakening of the Indian Rupee, nearing a record low of 91 against the US dollar, is a critical economic development with far-reaching implications for India's economy and its citizens. This phenomenon, while seemingly a simple currency fluctuation, is a complex interplay of global and domestic economic forces, monetary policies, and geopolitical events. Understanding its dynamics is crucial for competitive exam aspirants.
**Background Context: Understanding Currency Depreciation**
Currency depreciation refers to the fall in the value of a nation's currency relative to other currencies. In India's context, it means that more rupees are required to buy one US dollar. This is often driven by a higher demand for foreign currency (typically the dollar) than for the domestic currency. Several factors contribute to this, including a widening current account deficit (where imports exceed exports), capital outflows (foreign investors pulling money out), higher inflation compared to trading partners, and global risk aversion leading investors to safe-haven currencies like the dollar. Historically, the Rupee has faced periods of volatility, notably during the 2013 'Taper Tantrum' when the US Federal Reserve hinted at reducing its quantitative easing, leading to significant capital outflows from emerging markets.
**What Happened and Key Drivers**
As per the SBI Research analysis, the Indian Rupee has recently approached 91 per US dollar, a near-record low. The primary drivers identified for this depreciation are geopolitics, tariffs, and capital outflows. Geopolitical tensions, such as ongoing conflicts (e.g., Russia-Ukraine war) and instability in the Middle East, disrupt global supply chains, increase commodity prices (especially crude oil, a major Indian import), and create uncertainty, pushing investors towards safer assets like the dollar. Tariffs, or trade barriers, can impact trade balances, making imports more expensive or exports less competitive, thus affecting the demand-supply dynamics of the currency. Capital outflows occur when Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) sell their investments in Indian equities or debt and repatriate their funds, often due to higher interest rates in developed economies (like the US) or perceived risks in the Indian market. This reduces the supply of dollars in the Indian market and increases demand, leading to depreciation.
**Key Stakeholders Involved**
Several key stakeholders are directly involved in and affected by currency movements:
1. **Reserve Bank of India (RBI):** As the central bank, the RBI is the primary custodian of monetary policy and currency stability. It intervenes in the foreign exchange market by buying or selling dollars to manage volatility, uses interest rate adjustments (Repo Rate, Reverse Repo Rate) to influence capital flows, and manages India's foreign exchange reserves. Its mandate, outlined in the **Reserve Bank of India Act, 1934**, includes maintaining price stability while keeping in mind the objective of growth.
2. **Ministry of Finance, Government of India:** This ministry formulates fiscal policies (government spending, taxation) and trade policies that influence the overall economic health and investment climate. Policies promoting exports or attracting FDI can strengthen the Rupee.
3. **Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs):** These entities' investment decisions significantly impact capital flows. Their inflows strengthen the Rupee, while outflows weaken it.
4. **Exporters and Importers:** Exporters benefit from a weaker Rupee as their goods become cheaper for foreign buyers, boosting competitiveness. Importers, however, face higher costs as they need more rupees to pay for foreign goods and services, potentially leading to imported inflation.
5. **Indian Citizens:** Depreciation can lead to higher prices for imported goods (including essential items like crude oil and electronics), increasing inflation. It also makes foreign travel, education abroad, and remittances more expensive.
**Significance for India and Future Implications**
For India, a depreciating Rupee has multifaceted implications. Economically, it can worsen the current account deficit, exacerbate imported inflation (especially critical given India's reliance on oil imports), and increase the burden of servicing external debt. While it makes exports more competitive, the overall impact depends on the elasticity of demand for Indian exports. Politically, sustained high inflation due to depreciation can lead to public discontent. Socially, it erodes purchasing power, particularly for lower-income groups. The SBI Research projection of a potential rebound in the second half (H2) of the next fiscal year offers a glimmer of hope. This rebound could be driven by several factors: easing global inflation, stabilization of crude oil prices, a potential pause or reversal in the US Federal Reserve's interest rate hikes, renewed FII inflows as India's growth story remains robust, and effective intervention by the RBI. The government's focus on fiscal consolidation and structural reforms, along with the RBI's vigilant monetary policy under the **Monetary Policy Committee (MPC)** framework (established under the RBI Act, 1934, amended in 2016), will be crucial in managing this volatility and ensuring long-term currency stability. The **Foreign Exchange Management Act (FEMA), 1999**, provides the legal framework for managing foreign exchange transactions, ensuring orderly development and maintenance of the foreign exchange market in India.
**Connecting to Broader Themes**
This issue connects to broader themes of global economic interdependence, the challenges of maintaining macroeconomic stability in an open economy, and the delicate balance between monetary and fiscal policy. It highlights India's vulnerability to global shocks (like geopolitical conflicts and commodity price fluctuations) and the importance of robust domestic economic fundamentals and prudent policy management. The constant balancing act between fostering economic growth, controlling inflation, and managing external sector stability remains a core challenge for policymakers.
Exam Tips
This topic falls under GS Paper 3: Indian Economy (UPSC CSE) and general economics sections for SSC, Banking, and State PSC exams. Focus on macroeconomic concepts like Balance of Payments, inflation, interest rates, and foreign exchange rates.
Study the functions and tools of the Reserve Bank of India (RBI) in managing currency and monetary policy, including interventions, interest rate adjustments, and the role of the Monetary Policy Committee (MPC). Understand the provisions of the RBI Act, 1934, and FEMA, 1999.
Be prepared for conceptual questions on 'currency depreciation vs. appreciation,' 'factors causing depreciation/appreciation,' 'impact on different sectors (exporters, importers, consumers),' and 'government/RBI measures to counter depreciation.' Also, expect current affairs-based questions on recent Rupee movements.
Link this topic to global economic trends, such as crude oil prices, US Federal Reserve policies, global inflation, and geopolitical events. Understand how these international factors transmit to the Indian economy.
Practice analyzing data and trends related to India's Balance of Payments, foreign exchange reserves, and inflation figures. Understand the relationship between these indicators and currency movements.
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Full Article
After sliding to record lows near 91 per dollar, the Indian rupee may be nearing the end of its depreciation cycle, SBI Research suggests. Driven by geopolitics, tariffs and capital outflows, the currency is in a late-stage weakening phase, with statistical signals pointing to a potential rebound in the second half of the next fiscal year despite near-term volatility.