The Indian rupee is edging closer to the 80-mark against the US Dollar. As the US dollar regains global supremacy, the Indian rupee could fall below the 80-mark. US Inflation is at a 41-year high, and the US Federal Reserve could raise interest rates aggressively to control rampaging inflation. As investors worldwide are rushing to the safety of US government bonds, the Indian Rupee could depreciate further, impacting the Indian economy. Let’s understand if the rupee nearing 80 against the US dollar affects Indian businesses.
Will a weak Indian rupee support Indian exports?
Rupee depreciation against the US dollar is good for Indian exporters as they are paid in US Dollars. It means they get more Indian rupees for every US Dollar as the rupee hits a lifetime low of Rs 79.9 against the US dollar.
However, as the global economy is close to a recession because of the pandemic and the Russia-Ukraine crisis, the Indian export sector is facing subdued demand. People worldwide are cutting down on discretionary consumption affecting Indian exports.
India has recently imposed an export duty on steel and export tax on petrol, diesel and aviation turbine fuel shipped overseas, especially by private refineries. Moreover, there is a ban on the export of sugar and wheat.
Will a weak Indian Rupee lead to higher inflation?
International crude oil prices have been stubbornly high ever since Russia invaded Ukraine. It affects India, which imports more than 80% of its crude oil requirements. For instance, every 10% increase in international crude oil prices raises India’s Wholesale Price Index (WPI) by around 0.9%. It also has a sizable impact on retail inflation in the country.
Elevated crude oil prices mean India spends more US dollars on importing the commodity, which depletes Indian foreign exchange reserves. Moreover, the rupee may continue to depreciate against the US dollar until International crude oil prices fall.
If the rupee depreciates against the US dollar, it impacts industries that import raw materials to manufacture their products. Ultimately consumers bear the brunt as these higher costs are transferred to them, pushing up inflation in the economy. Moreover, businesses that raise funds through dollar-denominated debt are impacted by the Indian rupee depreciating against the US dollar.
How does RBI stop the fall of the rupee against the US dollar?
The RBI has been selling US dollars in the open market out of its foreign exchange reserves to stabilise the rupee. It increases the supply of US dollars in the open market but depletes India’s foreign exchange reserves. For instance, India’s foreign exchange reserves fell from $593.3 billion to $588.3 billion from June 24, 2022, to July 01, 2022.
RBI has given the go-ahead to a rupee-denominated settlement mechanism for foreign trade to boost the Indian rupee against the US dollar. For instance, RBI has permitted trade settlements between India and countries such as Russia and Sri Lanka in Indian rupees. It reduces the need for US dollars for foreign trade, thereby boosting the rupee.
The rupee depreciation against the US dollar will impact the Indian economy because of imported inflation. It is the general price rise in a country because of the rise in prices of imported products. Moreover, with retail inflation hitting 7.01% in June 2022, a weakening rupee will impact the Indian economy and businesses.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
