data | Hitting Record Lows: What’s Driving the Rupee’s Fall?

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Outflows from abroad and elevated oil prices are the two factors that accelerated the rupee’s decline

Outflows from abroad and elevated oil prices are the two factors that accelerated the rupee’s decline

On Monday, the Indian rupee fell to an all-time low of 77.36 against the US dollar. Outflows from abroad and elevated oil prices have accelerated the rupee’s decline. This coincided with foreign portfolio investors continuing to withdraw money from Indian equities and remaining net sellers over the past seven months. Additionally, since March, crude oil prices have hovered above $100 a barrel for most days following the Russian invasion of Ukraine. In this scenario, a weak rupee will further inflate the country’s import bill. India’s foreign exchange reserves have also been weakened due to central bank intervention in the spot market to support Indian unity.

At its lowest point

The chart shows the exchange rate of the Indian rupee against the US dollar between January 2010 and May 2022. The value of the rupee hit an all-time low on May 9th. The rupee’s previous low was reached on March 7, 2022 when it touched 76.92.

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Intense sale

The rupee’s decline was compounded by an exodus of foreign portfolio investors from the stock market. Investors turned to intense selling as April marked the seventh consecutive month that foreign outflows were higher. So far in calendar year 2022, foreign investors have withdrawn $18.27 billion from the Indian stock market.

Rising crude oil prices

The chart shows the monthly value of India’s crude oil imports (in billion US dollars). Crude oil prices have skyrocketed due to the Russia-Ukraine crisis. If the rupee depreciates, it will increase India’s import bill and widen the trade deficit.

Denting forex reserves

Foreign exchange reserves fell below $600 billion in the week ended April 29. The decline is likely due to the Reserve Bank of India’s intervention in the FX market to halt the fall of the rupee by selling dollars. The chart shows India’s foreign exchange reserves (in billion US dollars) on a weekly basis from January 2021 to May 2022.

Source: IMF, NSDL, CMIE

Also read: India’s vulnerability in the global economic turmoil

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