The Indian rupee depreciated beyond 85 against the dollar—the lowest in terms of the dollar in recent times. This is despite the Reserve Bank of India’s intervention to support the rupee. It is expected that this continued depreciation may put more pressure on the Indian economy and increase inflation. Experts with whom THE WEEK spoke feel that the government should step in to solve the issue and try to stabilise the fall of the rupee.
“A combination of global factors, such as the US Federal Reserve’s hawkish stance, and domestic challenges, including a widening trade deficit and signs of slowing economic growth, are responsible for this decline. This depreciation will increase the cost of imports, consequently contributing to inflation and exerting more pressure on the economy. While the RBI’s actions may provide short-term relief, it is vital that the government actively consider all measures, both fiscal and monetary, to bolster economic growth and stabilise the currency,” pointed out Bharath Supra, associate professor and the chairperson of the finance and MBA programme at the School of Business Management, NMIMS, Navi Mumbai.
The rupee was downweighed by a rally in the US Dollar and treasury yields, which was supported by robust US economic data and the recent hawkish stance of the Federal Reserve (US Fed). Upbeat data suggest a resilient economy and possibly sticky inflation in the coming few months will support the Fed’s position to maintain higher interest rates longer.
“Although the RBI has been actively intervening to curb the rupee’s depreciation by selling dollars and conducting dollar/rupee swaps, we believe this could only bring temporary relief to the rupee. We believe that challenges for the Indian economy will persist, such as weak economic growth, slower foreign inflows, and a strong dollar and will continue to weaken the currency going forward. It is expected that the Rupee will remain under pressure against the US dollar in the next 2 to 3 months and weaken further till 86.00 per dollar level,” observed Sriram Iyer, senior analyst at Reliance Securities.
Experts point out that the USD/INR pair has breached the 85.00 level, which was a key hurdle and further upside towards 85.50 initially and later towards 86.00 cannot be ruled out. All this is partly due to complex global and domestic dynamics. The US economy has published rigid economic performance data coupled with the Federal Reserve’s unwavering hawkish monetary policy support, strengthening the dollar. Concurrently, India is confronted with an increasing trade deficit (USD 37.84 billion in November 2024) together with GDP deceleration (5.4 per cent in the July-September quarter), exerting greater pressure on the rupee.
“The ailing equity markets and high crude oil prices are acting together to worsen the depreciation. The current situation reflects the light side of the taper tantrum of 2013. In that period, the monetary policy of the United States was the cause of capital flight that created a tough currency fluctuation in the emerging markets. Such a shift in global money can further increase the vulnerabilities in economies such as India’s, which is already challenged on the domestic front. The RBI savings have already taken several steps with the use of foreign exchange swaps and market interventions in defence against volatility. From a longer perspective, the rupee will be susceptible to continuing global uncertainties and domestic fiscal challenges. Long-term currency stability will depend on structural economic reforms and a return of favourable sentiment in the global markets,” remarked Vengalarao Pachava, assistant professor of business analytics at NMIMS Hyderabad.
It is believed that the psychological level of 85 could act as a potential stabilising point, with the possibility of RBI intervention to curb further depreciation. “The rupee continues to weaken against the dollar, driven by multiple factors. Key reasons include a sharp rise in the dollar index and US bond yields, sustained FII outflows in recent months, broad-based weakness in emerging market currencies, and a widening trade deficit,” said Santosh Meena, research head at Swastika Investmart.
