The Indian rupee has been under pressure, hitting record lows against the US dollar in mid-November 2024. The exchange rate fell to 84.48 on November 15, 2024, from 84.40 on November 11, marking a 0.09% decrease in value over the week. This depreciation reflects a combination of global economic trends and domestic market conditions.
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Why is the Rupee Depreciating?
Strengthening of the US Dollar: The US Dollar Index (DX100) climbed to its one-year high of 106.575 on November 15, 2024. The dollar’s rally was driven by expectations of sustained monetary policy tightening by the Federal Reserve.
FII Outflows: Foreign Institutional Investors (FIIs) have been selling off Indian assets, further weakening the rupee. Reduced foreign investment lowers demand for the rupee, causing its value to decline.
Higher US Inflation: The US Consumer Price Index (CPI) rose to 2.6% in October, exceeding expectations. This reinforced market sentiment that US interest rates would remain higher for longer, boosting the dollar’s appeal.
Impact of Trump’s Victory on Currency Markets
Donald Trump’s election victory has added to the dollar’s strength. Markets expect increased government spending and potential tariff hikes under his administration. These policies typically attract foreign investment to the US, strengthening the dollar but exerting downward pressure on emerging market currencies like the rupee.
How the Rupee Has Performed
Record Low Against the Dollar: The rupee hit an all-time low of 84.40 in mid-November. It has depreciated by 1.5% this year, moving from 83.21 to 84.48.
Yearly Trend: Persistent depreciation reflects domestic economic challenges and global financial market trends.
Why a Strong Dollar Affects the Rupee
Rising Import Costs: A stronger dollar makes imports more expensive, particularly crude oil, which India heavily relies on. This increases the trade deficit and puts further pressure on the rupee.
Capital Outflows: Higher US interest rates attract investors to US markets, reducing investment in emerging markets like India.
Inflation Pressures: The higher cost of imports can fuel inflation, limiting the Reserve Bank of India’s (RBI) ability to cut rates.
Expert Opinions
Jateen Trivedi, VP Research Analyst at LKP Securities, highlighted that rising US dollar rates and higher-than-expected inflation data in the US continue to weigh on currencies worldwide, including the rupee. The combination of these factors creates a challenging environment for the rupee to recover in the short term.
My Opinion on the Rupee’s Depreciation
The rupee’s fall highlights India’s vulnerability to global economic dynamics, particularly US monetary policy. While a weaker rupee can benefit exporters by making Indian goods cheaper abroad, it also raises import costs, especially for essential commodities like oil. Policymakers must focus on measures to attract more foreign investments and reduce the trade deficit.
Conclusion
The depreciation of the rupee against the dollar is a clear reflection of global economic trends and domestic market challenges. With the dollar gaining strength and US interest rates expected to stay high, the rupee may face continued pressure in the coming months. However, improving foreign investments and stabilizing inflation can help mitigate further depreciation. For now, India must tread carefully to balance growth, inflation, and currency stability in this volatile global environment.
