Explainer: Why the Rupee fell to an all-time low of 78 against the US Dollar today

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NEW DELHI: The Indian rupee hit a new high on Monday, touching 78.20 against the US dollar on June 13.
The rupiah is down 5% since January 2022 and the main reason for this is a stronger US dollar index, surging oil prices and dollar outflows from Indian stock and bond markets. Foreign institutional investors withdrew more than Rs 2.15,000 crore in the first five months of 2022, more than they brought in in 12 years between 2009 and 2021.
This sentiment is also reflected in stock markets. The Nifty and 30-stock BSE Sensex are down more than 10% since January.
One of the reasons for the massive sell-off is soaring interest rates around the world. When interest rates start to rise, FIIs start pulling money out of risky markets like India, and the depreciation of the rupee adds to the worries of foreign investors. When the US dollar appreciates, it is considered negative for emerging markets.
“Weak domestic markets, rising crude oil prices, dollar strength and continued foreign capital outflows are expected to keep the domestic currency under pressure in the coming week,” IFA Global said in a note on Sunday. .
Why has the rupee fallen?
“The rupee rose above 78 today, but it is not out of step with other currencies against the US dollar. Capital is flowing to safer havens like the United States. The endless war in Ukraine and the resulting supply disruptions and soaring oil prices have weakened growth prospects and increased costs. This has led FIIs to withdraw cash and weaken the rupee,” said Astha Mago, Managing Director partner at Client Associates.
“The value of INR has fallen by more than 20 rupees in the last decade and judging by the current scenario, it could fall even more. Although India is not the only one affected by this situation Forex, Asian and Central European currencies have also seen fluctuations.However, when it comes to INR, the aggressive approach of the United States with its economy and India’s higher inflation projection are the major players in this transaction.US monetary policies have seen higher interest rates and a limited supply of USD foreign outflows negatively, but this is also affecting the import of crude oil.This has already affected the stock market with Nifty and Sensex falling even more today, and will continue to disparage the Indian economy in terms of fuel prices.At this point, timely aggressive fiscal policies are needed for India to bear this is oops,” said Sonam Chandwani, Managing Partner, KS Legal and Associates.
The dollar index on the rise
The US dollar index continues to rise as it outperforms other currencies. Established in 1973, the US Dollar Index is used to measure the value of US currency against the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound and Swedish Krona. The value of the index is a good indication of the value of the dollar. value in world markets. If the USDX rises, it means the US dollar is gaining strength or value against other currencies.
When the value of the dollar increases, the value of all underlying assets linked to the dollar also increases. These include stocks of US companies, treasury bills, US government bonds, currency bonds and others.
An increase in the dollar index makes the dollar strong and depreciates the value of the Indian rupee. A weakened rupee makes imports more expensive and impacts the profitability of India Inc. due to increased production costs. Rising costs lead to inflation and the prices of goods and services rise, making finances more difficult for the common man.
“The US Dollar Index (DXY) has risen again and is poised to test 105 levels soon. This is reflected in emerging market (EM) currencies falling against the dollar. oil add to pressures on these currencies prices drive “imported inflation” which impacts corporate profitability, FII inflows Indian crude basket price is at its highest level in 10 years.
How does a rupee depreciate?
“If a rupee buys more dollars, the rupee has become stronger and vice versa. As investors sell rupee-based investments for dollar-based investments, a fall in the rupee is triggered, which is the cause of the current collapse of the rupee.As more investors sold rupee-based investments against dollars, the rupee hit an all-time low today.This could add to inflationary pressure as the India imports more compared to exports,” said Anushkaa Arora, director and founder of law firm ABA.
Interest rates and the rupee
In response to unprecedented retail price inflation in the United States, the US Federal Reserve is expected to raise its policy rates by around 75 basis points. When the US Fed raises interest rates, returns on dollar assets rise relative to those in emerging markets like India.
“When the rupee depreciates, the investment value of FIIs decreases which impacts the total amount invested. So, to avoid any further loss, FIIs sell their investment to cover the loss,” Sameer Jain said. , Managing Partner, PSL Advocates & Solicitors.
As money moves out of India, the rupee-dollar exchange rate is impacted causing the rupee to depreciate. Such a depreciation puts considerable pressure on the already high import prices of crude and raw materials, paving the way for higher import inflation and production costs in addition to higher retail inflation. .
“When the rupee falls against the US dollar, there is a massive impact on the rising cost of imports since payments are made in USD. Exports, on the other hand, gain if the receipt is in USD. Imports that become expensive impact the local cost of living causing more inflation,” Jain added.
India Ratings and Research in its note said rising inflation in advanced economies prompted global central banks not only to withdraw ultra-loose monetary policy but also to raise their key rates even before policy action. from the RBI on May 4, 2022. The US Fed raised its policy rate by 25 basis points (bps) for the first time in March 2022 after a gap of more than three years and followed it with another increase of rate of 50bp in May 2022.
“As expected, the US Fed’s monetary tightening triggered an outflow of portfolio investment. By May 16, foreign portfolio investors had withdrawn $21.2 billion from India. This, in addition to a higher import bill, has put sudden pressure on the Indian rupee and the foreign exchange reserve,” he added.
Ind-Ra believes the Indian Rupee will depreciate by 4.9% and average 78.19 per USD in FY23.
Crude oil
The rupiah has come under further pressure since the deepening of the geopolitical crisis following Russia’s invasion of Ukraine in late February. India depends on crude oil imports to meet 85% of its energy needs. Whenever oil prices rise, it tends to put pressure on the rupee as India’s import bills soar against rising crude prices. The price of Brent on May 21 was around $110 a barrel, which has now risen to $122 a barrel. In the recent policy review last week, the RBI assumed international oil price rates to be $105 to estimate inflation.
“Assuming a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel, inflation is now projected at 6.7% in 2022-23, with an initial quarter at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and in the fourth quarter at 5.8%, with balanced risks,” RBI Governor Shaktikanta Das said last week when presenting the monetary policy statement.
If oil prices increase, it means that imports are continuously increasing. This drives up the demand for US dollars, which strengthens the dollar against the rupee and the Indian rupee continuously depreciates. This erodes the purchasing power of Indian currency in the international market.
REITs extract
Foreign investors pulled out of Indian stock markets and withdrew almost Rs 14,000 crore in June. With this, net equity outflows by Foreign Portfolio Investors (REITs) reached Rs 1.81 lakh crore in 2022.
“That’s because a lot of the change like the economic downturn, hawkish monetary policy, supply constraints and high inflation is reflected in market prices, which were consolidating over the past 7 months. And for central banks to maintain the aggressive long-term policy, inflation needs to stay high,” said Vinod Nair, head of research at Geojit Financial Services.
Foreign inflows in the equity market are one of the determining factors for the strength of the rupee. Whenever foreign investors become net sellers, the rupee depreciates. In June 2013, fearing that the US Federal Reserve might reduce its quantitative easing, FIIs withdrew more than $7.5 billion from Indian markets, causing the rupee to fall 6%.
“A falling rupee affects FIIs as it decreases their net profits in the stock and bond market. When a foreign investor places 60,000 rupees in a rupee bond yielding 8% per annum. dollar was at Rs 60. Therefore, his investment was $1,000, on which he earned $80 (at 8%) in interest. Now, if the dollar is at Rs 70 at the time of redemption, that is- that is, the rupee has depreciated, the value of his investment will decrease to $857. This will reduce his interest income to $68. The value of his investment at the end of the year will be $925, or an overall loss of 7.5%.As the value of their investments declines, foreign investors could engage in distress selling.When these investors withdraw their funds from the market in panic, the value of the rupee may further depreciate, as many foreign investments will be pulled out of the market with the speculative money,” says Kotak Securities.



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