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DAILY NEWS ANALYSIS

  • 02 January, 2023

  • 5 Min Read

Indian Rupee Depreciation

Indian Rupee Depreciation

  • In 2022, the Indian Rupee saw a 10% decline against the US dollar, making it the worst-performing Asian currency.
  • This decrease was mostly caused by the US dollar's rise as a result of its safe-haven appeal during global recession and inflation fears as well as the Russia-Ukraine war.

In 2022, How did the rupee perform?

  • The rupee hit a record low against the dollar of 83.2 during the year. Other Asian currencies depreciated to a lower amount than the rupee.
  • The value of the Chinese Yuan, Philippine Peso, and Indonesian Rupiah declined by about 9% during the year. Malaysian Ringgit and South Korean Won both had declines of between 6% and 7%, respectively.
  • The Reserve Bank of India (RBI), however, actively interfered in the foreign exchange market to support the rupee. The nation's foreign exchange reserves have decreased by USD 70 billion since the start of 2022. As of December 23, 2022, it was worth USD 562.81 billion.
  • Although there has been some erosion of reserves, the central bank is now beginning to rebuild them, which will serve as a safety net in uncertain times.

What caused capital outflows, and why?

  • In 2022, the US Fed aggressively increased interest rates by 425 basis points (bps) to combat inflation. Due to the increased interest rate difference between the US and India as a result, investors began to invest in the US market instead of the domestic one in order to benefit from the higher rates.
  • The highest-ever yearly net outflow was made by Foreign Portfolio Investors (FPIs) in 2022 when they withdrew Rs 1.34 lakh crore from Indian markets.
  • The currency was under pressure in 2022 as they withdrew Rs 1.21 lakh crore from the equity markets and Rs 16,682 crore from the debt market.
  • The invasion of Ukraine by Russia aggravated the FPI withdrawals, while the global economic recession made it more difficult for inflows.

What would the depreciation's effects be on the Indian economy?

Positive:

  • In theory, a weaker rupee should increase India's exports, but given the current state of global uncertainty and the country's weak demand, this may not be the case.

Negative:

  • It raises the possibility of imported inflation and may make it more challenging for the central bank to sustain historically low-interest rates for a longer period of time.
  • Over two-thirds of India's domestic oil needs are satisfied by imports.
  • Among the major importers of edible oils is India.
  • A weaker currency will drive up the price of imported edible oil and food inflation.

What is the Rupee Forecast for 2023?

  • Although the outlook for the rupee is still bleak in the immediate term, India's economy continues to grow at the quickest rate, thus the local currency's decline may not last much longer.
  • Although the US Fed's terminal interest rate was anticipated, their monetary policy cannot continue to be tightened indefinitely.
  • The tide will undoubtedly change once the (US Fed) tightening is completed.

Source: The Indian Express


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