A combination of factors such as macroeconomic problems in euro zone, high trade deficit, slowing FII and FDI inflows, and renewed RBI policy of not interfering in the forex market, saw Rupee tumbling down to 2-year lows of Rs.48 per US dollar-mark in early trade today.
You heard it right – RBI has not intervened in the foreign exchange market for a long streak of eight successive months; and has reaffirmed its view that unless the situation is grave and adverse enough for the country’s apex financial institution to check volatility in the currency market, it would continue with its hands-off approach.
One Year Rupee Vs Dollar Exchange Rate Graph
While weakening rupee is beneficial for exporters; it renders imports across import-intensive industries, including petroleum products, costlier for the payments made in US dollars. India is the world’s largest importer of pulses, cooking oil and fertilizers. A sharp depreciation in the value of rupee negates the impact of fiscal measures, such as imposition of export duties to fulfill domestic demand, undertaken by the government to cool down inflation.
Coming back to impact on petroleum products, a dramatic dip in rupee’s value has a negative impact on the economy, not only in terms of expensive imports, but also costlier crude oil prices for a net fuel-importing country like India. With the depreciating rupee, imports of crude oil, edible oil and capital goods become expensive. Higher oil prices puts pressure on inflation.
While weakening rupee benefits exporters in meeting their cost and wage bills better; it negatively impacts the outbound tourist traffic clouded by fluctuating ATF prices pushed higher by the strengthening dollar, which adversely impacts operating costs of airline companies.
30 Day Rupee Vs Dollar Exchange Rate Graph
The purchasing power of rupee vis-à-vis dollar is determined by the demand for and supply of rupee in the international market. Forex dealers have attributed the recent sharp drop in rupee value to concerns related to Europe’s debt problems snowballing into a banking crisis, pushing investors to seek shelter under dollar’s perceived safety.
Today, the Indian rupee opened at 47.78 per dollar, as against yesterday’s close of 47.60, and went past 48 levels for a few early morning trades. Technical forex analysts have maintained that if rupee remains weak below the crucial 48-mark for few more days, the currency is likely to go down all the way to 50 per dollar.
Trade analysts are of the view that India’s high current account deficit and low interest from exporters to sell dollars is gradually driving the rupee prices lower. At the same time, in a risk-off kind of sentiment worldwide, latching on to the dollar is still considered a safer investment bet.
The rupee has depreciated 3% in past 6 days. This unusual fall in rupee value is likely to cost India $11.5 million a day extra against its cost of crude oil imports, which is nothing but a kind of imported inflation. India is equally dependent on imported energy and hydrocarbons.
Market pundits believe that more than weakening of the rupee fundamentals, it’s about strengthening of the dollar that’s playing out over here. People are already invested in Gold until neck deep levels – almost fuelling the price of the precious metal to bubble zone. So, trickling of fresh investments in Gold is much unlikely from hereon. Under such circumstances, it’s quite obvious that the next safely perceived investment destination would be dollar currency.
If rupee continues to slump in the same way for some more weeks, we aren’t far-off from touching the psychological 50 mark to dollar.