The Indian rupee has hit a fresh all-time low of 85.80 per US dollar on Friday, marking a significant decline for the fourth consecutive session. The rupee fell by 53 paise compared to the previous session’s close of 85.27. Several factors have contributed to the rupee’s weakening against the dollar, leading to concerns about the sustainability of the currency’s value in the face of a strengthening US dollar and ongoing capital outflows from India.
Key Factors Behind the Rupee’s Decline
Dollar Strengthening: The primary reason behind the rupee’s slump is the strengthening of the US dollar. The greenback’s strength is largely driven by soaring US Treasury yields, which have reached around 4.50% for the 10-year bond. As the US dollar strengthens globally, it becomes more expensive for countries like India to purchase foreign goods, leading to a decrease in the value of the rupee.
Month-End and Year-End Dollar Demand: A significant portion of the rupee’s depreciation is attributed to the increased demand for dollars as businesses and importers make month-end and year-end payments. This spike in demand for the dollar has put additional pressure on the Indian rupee.
The expiry of the December currency futures contract and maturing Non-Deliverable Forward (NDF) positions have also contributed to the demand for dollars, exacerbating the rupee’s fall.
Capital Outflows: Capital outflows from India have further compounded the pressure on the rupee. As foreign investors pull out funds from Indian markets, the demand for foreign currency increases, weakening the domestic currency.
Global Crude Oil Prices: Crude oil prices, a significant import for India, remain a crucial factor in the rupee’s performance. While Brent crude has seen some rise, hovering at USD 73.31 per barrel, the impact has been relatively muted compared to the stronger influence of dollar demand and capital outflows. A higher crude price usually increases the demand for dollars, further straining the rupee.
Positive Domestic Cues: Despite the rupee’s fall, positive cues from the domestic equity market have somewhat limited the rupee’s decline. The Indian stock market has shown resilience, which has provided a slight buffer against the broader currency depreciation.
Impact of the Dollar Index
The Dollar Index (DXY), which measures the US dollar’s strength against a basket of six major currencies, was trading higher by 0.04% at 107.93. The rise in the dollar index is reflective of the global demand for the greenback, particularly amid heightened US Treasury yields and expectations of further tightening by the Federal Reserve. The higher bond yields in the US attract international capital, increasing the demand for the dollar and weakening other currencies like the rupee.
India’s Economic Landscape and the Rupee’s Decline
The fall in the rupee is part of a broader global trend of emerging market currencies under pressure from a strong US dollar and rising commodity prices. For India, the situation is further exacerbated by the country’s trade deficit, high import costs, and challenges in attracting sufficient foreign capital inflows to offset the outflows.
India’s external debt is also a factor that could make the country more vulnerable to a strong dollar, as repayments on foreign-denominated debt become more expensive. The government’s continued focus on infrastructure and development projects means it will likely need to increase its foreign borrowing in the future, adding further pressure on the rupee.
Outlook for the Rupee
While there is ongoing support for the rupee from positive domestic factors, the outlook remains challenging due to the dominance of global factors. The continued strengthening of the US dollar, capital outflows, and high commodity prices, particularly oil, are likely to keep the pressure on the rupee.
The Indian government and central bank may attempt to intervene in the currency markets to stabilize the rupee, but the effectiveness of such interventions may be limited unless there is a change in the global economic environment, such as a shift in US monetary policy or a decline in crude oil prices.
In conclusion, the rupee’s decline to 85.80 per US dollar reflects a combination of external pressures, including a stronger US dollar, global economic factors, and internal factors such as capital outflows and higher import demand. Whether the rupee can regain strength will depend on how these factors evolve in the coming months, particularly as India navigates through a challenging global financial landscape.
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