Rupee down, slips for second week as dollar demand outlasts likely RBI support

The recent depreciation of the Indian Rupee, breaking the critical 90-per-dollar mark and experiencing a second consecutive weekly decline, is a significant economic event with far-reaching implications for India. This movement in the currency market is not merely a number game but reflects underlying economic dynamics, both domestic and global, and directly impacts various sectors and individuals.

To understand this, let's first establish some background context. An exchange rate, like the Rupee-Dollar rate, is simply the price of one currency in terms of another. It's determined by the forces of demand and supply in the foreign exchange market. When the demand for a foreign currency (like the US Dollar) exceeds its supply, its price goes up, meaning the domestic currency (Rupee) depreciates. Conversely, if the supply of dollars exceeds demand, the Rupee appreciates. India operates on a 'managed float' exchange rate system, where the market primarily determines the rate, but the Reserve Bank of India (RBI) intervenes occasionally to smooth out excessive volatility.

The immediate trigger for the Rupee's recent slide, as highlighted in the news, was "persistent year-end dollar demand." This phenomenon often occurs towards the end of the financial year or calendar year as Indian companies and entities with foreign currency obligations (like import payments, external commercial borrowings, or profit repatriation by multinational corporations) step up their dollar purchases. This surge in demand, coupled with potentially reduced dollar inflows, creates an imbalance. Despite this, the article mentions "likely RBI support," indicating that the central bank was actively selling dollars from its foreign exchange reserves to cushion the fall, a typical intervention strategy to prevent sharp, speculative depreciation.

Several key stakeholders are directly impacted by and involved in these currency movements. The **Reserve Bank of India (RBI)** is the primary custodian of monetary policy and exchange rate management. Under the **Reserve Bank of India Act, 1934**, and subsequent amendments, the RBI is tasked with maintaining monetary stability and ensuring orderly conditions in the financial markets, which includes managing the Rupee's external value. It intervenes through buying/selling foreign currency, adjusting interest rates, and using other monetary tools. The **Government of India**, particularly the **Ministry of Finance**, is also a crucial stakeholder. Its fiscal policies, trade policies, and efforts to attract Foreign Direct Investment (FDI) and manage the Current Account Deficit (CAD) significantly influence the Rupee's trajectory. **Exporters and Importers** are directly affected: a weaker Rupee makes Indian exports cheaper and more competitive in global markets, but simultaneously makes imports (like crude oil, electronics, and machinery) more expensive. **Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs)**, who invest in Indian equities and debt markets, are sensitive to exchange rate volatility. Capital outflows by FIIs can exert downward pressure on the Rupee. Finally, the **general public** is impacted through inflation (especially imported inflation) and the cost of foreign travel or education.

This depreciation matters significantly for India's economy. Firstly, it fuels **imported inflation**. India is a major importer of crude oil, and a weaker Rupee means that oil becomes more expensive in Rupee terms, leading to higher fuel prices and cascading effects on transportation, manufacturing, and food costs. This complicates the RBI's inflation-targeting mandate, set by the **Monetary Policy Committee (MPC)**. Secondly, while it makes exports more competitive, the benefit might be offset by the higher cost of imported inputs for many export-oriented industries. Thirdly, a weaker Rupee increases the burden of **external debt** for Indian companies and the government, as they need more Rupees to service their dollar-denominated liabilities. This can strain corporate balance sheets and potentially impact sovereign debt ratings. Lastly, persistent depreciation can erode investor confidence, making India a less attractive destination for foreign capital, which is crucial for funding infrastructure and economic growth.

Historically, India has experienced periods of significant exchange rate volatility. The 1991 economic crisis, for instance, saw a sharp devaluation of the Rupee as part of broader economic reforms. More recently, events like the 2008 global financial crisis and the 2013 'Taper Tantrum' also led to substantial Rupee depreciation, prompting strong RBI intervention. India's journey from a fixed exchange rate regime to a managed float system under the **Foreign Exchange Management Act (FEMA), 1999**, reflects its evolving approach to currency management, aiming for stability while allowing market forces to play a role.

Looking ahead, the future implications depend on a confluence of factors. Global factors such as the US Federal Reserve's monetary policy (interest rate hikes strengthen the dollar), geopolitical tensions, and global crude oil prices will continue to influence the Rupee. Domestically, India's economic growth trajectory, inflation management, fiscal prudence (as outlined in the **Union Budget**), and the ability to attract stable capital inflows will be crucial. The RBI will likely continue its strategy of judicious intervention to prevent excessive volatility without targeting a specific exchange rate. Sustained depreciation could necessitate further interest rate hikes by the RBI to curb inflation and attract capital, potentially impacting economic growth. Conversely, a stable Rupee is vital for long-term economic planning and investor confidence, linking this event to broader themes of economic governance, international finance, and India's position in the global economy.