Mint Primer: The rupee, its fall, slight recovery and what the RBI did

On 3 January 2022, one dollar was worth  ₹74.3. On 15 November, it was worth  ₹83.1, implying that the rupee has lost close to 12% against the dollar. (AFP)
On 3 January 2022, one dollar was worth 74.3. On 15 November, it was worth 83.1, implying that the rupee has lost close to 12% against the dollar. (AFP)

Summary

  • Mint explains the reasons behind the rupee’s slide in the recent past and gives a peek into the future

On 10 November, India’s currency touched an all-time low of 83.5 against the dollar. It has now recovered a little, closing at 83.1 on 15 November. Mint explains the reasons behind the rupee’s slide in the recent past and gives a peek into the future.

By how much has the rupee depreciated?

On 3 January 2022, one dollar was worth 74.3. On 15 November, it was worth 83.1, implying that the rupee has lost close to 12% against the dollar. This fall in value hasn’t been linear and the value of the rupee against the dollar has moved up and down during the period, as is the case with any currency which is on a largely flexible exchange rate system. Of course, the Reserve Bank of India (RBI) intervenes in the foreign exchange market—as it most probably did on 10 November and has possibly done since then too. The intervention is to ensure that the value of the rupee doesn’t fall too quickly.

Why does the RBI intervene in forex?

A fall in the value of the rupee tends to benefit exporters given that they earn more rupees for every dollar they earn. Of course, like everything else in economics, there is a flip side as well. A weaker rupee means imports become more expensive in rupee terms. Now, India imports a very large chunk of the oil that it consumes. Data from the Petroleum Planning and Analysis Cell suggests that from April to August, 87.8% of the oil consumed was imported—against 86.5% during the same period last year. This dynamic forces the RBI to sell dollars and buy rupees in order to slow down the depreciation of the rupee.

Graphic: Mint
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Graphic: Mint

How does higher oil price in rupee terms hurt?

A higher price of oil in rupees typically means a higher price of petrol, diesel, cooking gas, kerosene etc. Of course, lately the government has managed the price of these retail-facing petroleum products and thus inflation. Nonetheless, someone has to pick up the tab for this in the form of losses or lower profits. And that is typically done by the oil marketing companies.

Why has the rupee been depreciating?

For the last 19 months, the US Federal Reserve has been raising interest rates in a bid to control inflation. At the same time it has been gradually withdrawing money it had printed and pumped into the financial system in the aftermath of the pandemic. So, with less money going around interest rates have been going up. This implies that higher returns are available in the US, which means greater demand for dollars than other currencies like the rupee. This largely explains the depreciation of the rupee.

How are things going to pan out?

During the day on 10 November one dollar was worth 83.5. On 15 November, during the day, it was worth 82.9. How did this happen? People who track the foreign exchange market believe the RBI might have sold dollars. Further, inflation in the US cooled down to 3.2% in October. If US inflation keeps falling, the Fed is likely to cut rates. This might mean lower returns in the US, with money likely to move to other parts of the world, including India. The foreign exchange market might be discounting this possibility.

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