#NewsBytesExplainer: What is causing Indian rupee's fall against US dollar
This week saw the Indian rupee hit an all-time low against the US dollar as it moved past the 79 rupees to a dollar mark. Despite recovering from its worst position ever, analysts see the Indian rupee weakening further in the coming months. In this situation, it is imperative for us to have a better understanding of this fall and the factors causing it.
Rupee has lost 6.39% against US dollar since 2022
On Wednesday, the Indian rupee closed at an all-time low of Rs. 79.04 against the US dollar. The 18 paise fall from the previous day's closing rate was the fourth consecutive one. Since the beginning of 2022, the rupee has lost 6.39% against the US dollar, including a 1.97% fall in June alone. The question we must answer is what is weakening the rupee.
Net foreign capital outflow leads to depreciation of rupee
Indian rupee's downward journey against the US dollar can be mainly attributed to a strong dollar index, rising crude oil prices, and continuous outflow of foreign capital. So far in 2022, foreign portfolio investors have sold Rs. 1.81 lakh crore worth of equities. A net outflow of foreign capital means a depreciating rupee. A falling rupee leads to a further decrease in foreign investments.
Rising oil prices erode the purchasing power of Indian rupee
The Indian rupee has come under more pressure than ever due to surging oil prices amid the Russia-Ukraine crisis. Considering India's dependency on crude oil imports to meet its energy requirement, rising oil prices is not a favorable condition. Increasing crude oil prices mean an increase in demand for the US dollar. This, in turn, reduces the purchasing power of the rupee.
Increase in dollar index leads to falling emerging market currencies
The US dollar has been increasing in strength. The US dollar index (DXY) which measures the value of the dollar against other major currencies has shown that the US currency is in a strong position. An increase in the DXY means a corresponding depreciation in the value of the Indian rupee. A weakened rupee increases import prices, which in turn weakens it further.
Interest rate hike by US Fed leads to capital outflow
Rising retail inflation in the US forced the Federal Reserve to hike interest rates. An increase in interest rate by the US Fed leads to an increase in return on dollar investments. This leads to foreign capital outflow from emerging markets such as India. As money flows out of the country, the rupee's value against the dollar takes a hit.
Rupee may slide below Rs. 80 to a dollar mark
The Indian rupee's near future is not a bright one, at least according to most analysts. Weighed down by rising oil prices, hawkish central bank policy, and other factors, many see it sliding past the 80 rupees to a dollar mark in the coming weeks. As the fundamentals continue to weaken, the slide is expected to continue, despite the central bank's interference.
