Relevant for Exams
Rupee slumps 0.6% to 90.8650/dollar, worst drop since November, nears all-time low.
Summary
The Indian Rupee experienced a significant depreciation, closing at 90.8650 per US dollar, marking its worst daily drop of 0.6% since mid-November and nearing its all-time low of 91.0750. This currency movement is vital for competitive exams as it reflects India's economic stability, impacts trade balances, inflation, and the Reserve Bank of India's intervention strategies, making it a key indicator for economic analysis.
Key Points
- 1The Indian Rupee closed at 90.8650 per US dollar.
- 2The currency recorded a daily depreciation of 0.6%.
- 3This was the Rupee's worst single-day drop since mid-November of the previous year.
- 4The Rupee neared its all-time low of 91.0750 per dollar, which was hit in December.
- 5The currency depreciated by approximately 0.7% on a week-on-week basis.
In-Depth Analysis
The recent depreciation of the Indian Rupee, closing at 90.8650 per US dollar and marking its worst daily drop since mid-November, is a critical economic development with far-reaching implications for India. Understanding this phenomenon requires delving into the intricate interplay of domestic and global economic forces.
**Background Context: What is Currency Depreciation?**
Currency depreciation refers to the fall in the value of a currency relative to other currencies, typically the US dollar, in a flexible exchange rate system. This means that more Indian Rupees are now required to purchase one US dollar. Several factors contribute to this. Globally, a strong US dollar, often driven by expectations of higher interest rates by the US Federal Reserve, tends to put pressure on emerging market currencies like the Rupee. Domestically, factors such as a widening current account deficit (where imports exceed exports), significant outflows of Foreign Institutional Investments (FIIs) from Indian markets, and high crude oil prices (as India is a major oil importer) can lead to Rupee weakness. Investor sentiment, geopolitical tensions, and domestic economic data also play a crucial role.
**What Happened: The Specifics of the Recent Slide**
The Indian Rupee closed at 90.8650 per dollar, registering a daily depreciation of 0.6%. This was its sharpest single-day fall since mid-November of the previous year and brought it perilously close to its all-time low of 91.0750 per dollar, recorded in December. Furthermore, the currency saw a week-on-week depreciation of approximately 0.7%. This significant movement indicates underlying pressures that are causing foreign investors to either pull out funds or demand a higher premium for holding Rupee-denominated assets.
**Key Stakeholders and Their Roles**
Several entities are directly impacted by or play a role in managing currency fluctuations:
* **Reserve Bank of India (RBI):** As India's central bank and monetary authority, the RBI is the primary guardian of currency stability. It intervenes in the foreign exchange market by buying or selling US dollars to temper volatility and prevent excessive depreciation or appreciation. Its actions are guided by the **Reserve Bank of India Act, 1934**, which empowers it to manage monetary policy and maintain price stability, indirectly influencing the exchange rate. The RBI's foreign exchange reserves are its primary tool for intervention.
* **Ministry of Finance, Government of India:** The government, through its fiscal policies (taxation, spending), influences the overall economic environment, including the trade balance and investor confidence, which in turn affects the Rupee. Managing the fiscal deficit is crucial as a high deficit can put pressure on the currency.
* **Exporters:** A weaker Rupee is generally beneficial for exporters as they receive more Rupees for the same dollar earnings, making their goods and services more competitive in international markets.
* **Importers:** Conversely, importers face higher costs as they need to spend more Rupees to buy the same amount of dollars to pay for imported goods (like crude oil, electronics, capital goods). This can lead to increased operational costs and potentially higher consumer prices.
* **Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs):** Their investment decisions (inflows into Indian equities and debt markets or outflows) are a major driver of Rupee movement. When FIIs withdraw funds, they sell Rupees to buy dollars, leading to depreciation.
* **Indian Citizens/Consumers:** A depreciating Rupee can lead to 'imported inflation,' where the cost of imported goods rises, affecting household budgets. It also makes foreign travel, education abroad, and remittances more expensive.
**Significance for India: Economic, Political, and Social Impact**
* **Trade Balance and Current Account Deficit (CAD):** While a weaker Rupee can boost exports, its impact on India's overall trade balance is often offset by the country's high dependence on essential imports, especially crude oil. A significantly depreciating Rupee can widen the CAD, making the economy more vulnerable.
* **Inflation:** Increased cost of imports, particularly crude oil, directly fuels inflation, impacting the common person. The RBI's primary mandate under the **Monetary Policy Framework Agreement** (between the Government of India and RBI, revised in 2016) is to maintain price stability, with an inflation target of 4% (+/- 2%). Rupee depreciation complicates this task.
* **Foreign Debt Servicing:** Indian companies and the government with dollar-denominated debt find their repayment obligations increase in Rupee terms, potentially straining finances.
* **Investor Confidence:** Persistent Rupee weakness can signal economic instability, deterring fresh foreign direct investment (FDI) and FII inflows, which are crucial for economic growth and job creation.
**Historical Context and Future Implications**
India has experienced periods of significant Rupee depreciation in the past, notably during the 1991 economic crisis, the 2008 global financial crisis, and the 2013 'Taper Tantrum.' These episodes underscore the vulnerability of emerging market currencies to global liquidity shifts and domestic economic fundamentals. The current depreciation is part of a broader trend of global economic uncertainty, including persistent inflation in major economies, the US Federal Reserve's hawkish monetary stance, and geopolitical tensions.
Looking ahead, the RBI will likely continue to monitor the situation closely and intervene to curb excessive volatility, drawing upon its substantial foreign exchange reserves. However, sustained intervention can deplete reserves. The government's focus on boosting domestic manufacturing through initiatives like 'Make in India' and promoting exports, alongside prudent fiscal management, will be crucial. The trajectory of global crude oil prices and the US Fed's interest rate decisions will remain key determinants of the Rupee's future performance. A depreciating Rupee presents a challenging balancing act for policymakers, weighing the benefits for exporters against the inflationary pressures and increased import costs for the broader economy.
**Related Constitutional Articles, Acts, or Policies**
* **Reserve Bank of India Act, 1934:** Governs the functioning of the RBI, including its role in monetary policy and foreign exchange management.
* **Foreign Exchange Management Act (FEMA), 1999:** Replaced FERA (Foreign Exchange Regulation Act) and regulates foreign exchange transactions in India, aiming to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.
* **Monetary Policy Framework Agreement (2016):** Formalizes the inflation targeting framework for the RBI, which indirectly influences exchange rate policy. The Monetary Policy Committee (MPC) is responsible for setting the policy interest rate.
* **Union Budget and Fiscal Policy:** Government's annual financial statement and its expenditure/revenue policies impact economic growth, trade balance, and investor confidence, thereby affecting the Rupee.
Exam Tips
This topic falls under the 'Indian Economy' section for UPSC (GS Paper III), SSC, Banking, Railway, and State PSC exams. Focus on understanding the causes and effects of currency depreciation/appreciation.
Study related topics like Balance of Payments (BoP), Current Account Deficit (CAD), Inflation (especially imported inflation), Monetary Policy (RBI's tools and role), and Fiscal Policy (government's role in managing external sector) in conjunction with this.
Common question patterns include: direct questions on factors causing Rupee depreciation, the impact of a weaker Rupee on specific sectors (e.g., exporters, importers), the role of the RBI in managing exchange rates, and differentiating between 'depreciation' and 'devaluation'.
Related Topics to Study
Full Article
The rupee closed at 90.8650 per dollar, down 0.6% on the day to log its worst drop since mid-November last year and inching closer to its all-time low of 91.0750 hit in December. The currency was down about 0.7% week-on-week.
