The rupee has been continuously declining, and there are no indications that it will begin to appreciate appreciably any time soon.
On Monday, the rupee lost 19 paisas and fell to a brand-new all-time low of 79.45 against the U.S. dollar.
Why then is the rupee depreciating?
The value of the Indian rupee against the U.S. dollar is determined by supply and demand. The value of the rupee falls when there is a greater demand for dollars and vice versa.
The Russian-Ukrainian conflict’s impact on supply chains, the Covid pandemic’s aggravation of global economic problems, inflation, high prices for crude oil, etc., have contributed to the Indian rupee’s slide since the beginning of this year.
Because foreign institutional investors (FIIs) have sold shares worth more than $30 billion this year, there have been significant outflows of foreign funds from domestic markets.
This is far more than the $11.8 billion sell-off observed during the 2008 global financial crisis.
The dollar-rupee exchange rate is impacted as money leaves India, which causes the rupee to devalue.
The import prices of petroleum and raw commodities, which are already high, are significantly impacted by this depreciation.
Along with increasing retail inflation, this, in turn, raises import inflation and production costs.
The U.S. Federal Reserve recently increased interest rates, and when compared to other emerging markets like India, the return on dollar assets increased.
Additionally, rumors exist that the U.S. Fed may increase rates more aggressively, which would be detrimental to the rupee.
India pays in U.S. dollars since the nation mostly imports crude oil, metals, electronics, and other goods.
If the rupee is weak, it will cost more to purchase the same amount of goods.
In such circumstances, the cost of production and raw materials increases, passing the expense on to customers.
Conversely, when shipments become more competitive and overseas customers have more purchasing power, a weaker home currency increases exports.
However, exporters do not favor the currency decline in the current environment of weak global demand and ongoing volatility.
Given that India imports more than 80% of its crude oil, the nation’s largest import, inflation will be the most affected by the declining rupee.
Since Russia invaded Ukraine in February of this year, crude prices have consistently remained at over $100 per barrel.
Inflationary pressures in the economy will only increase due to high oil costs and a declining rupee.
When crude prices rise, it puts pressure on the rupee since India’s import costs rise.
Brent crude reached a price of $110 per barrel in May, currently trading at $122 per barrel.
If oil prices are growing, imports must also be rising steadily. This increases demand for the U.S. dollar, strengthening it relative to other major currencies.
Since January of this year, the Indian rupee has been losing value, which reduces the purchasing power of the rupee on the global market.
The Reserve Bank of India (RBI) is waging a multifaceted battle to halt the rupee’s slide into new lows.
According to reports, the central bank sold dollars on Wednesday for between 78.97 and 78.98 per U.S. dollar. In addition, it significantly increased its foreign exchange reserves to protect the rupee from a rapid devaluation.
The foreign exchange reserves have decreased by $40.94 billion since February 25.
As a result, the global economy has slowed due to high inflation, the Covid crisis, monetary tightening by important central banks, and supply chain disruptions brought on by the Russia-Ukraine war, resulting in massive rupees decline.
What then are the solutions to arrest this worrying slide of the rupee?
Last week, the government announced several actions that are likely to limit international commerce and stop the devaluation of the rupee, including an increase in the customs charge on gold and higher taxes on the export of gasoline, diesel, and ATF.
The import tax on gold was also raised from 7.5% to 12.5%.
On Wednesday, the Reserve Bank of India unveiled a host of initiatives to attract a significant amount of funds, including opening additional government assets to fully accessible trading and allowing foreign investors to purchase short-term corporate debt.
The RBI took action after its foreign exchange reserves decreased by more than $40 billion over the previous nine months, mostly due to its currency market interventions to stop rupee losses.
Nevertheless, the rupee has lost about 6 percent of its value against the dollar this year. Some analysts have claimed that the economic challenges India is currently facing are uncannily similar to the 2013 taper tantrum crisis.
These challenges include high inflation, stressed current and fiscal accounts, and significant portfolio outflows amid tightening global financial conditions.
Foreign investors are anticipated to wait and see how the interest rate differentials with the United States play out before beginning to reinvest in the economy. However, inflation is anticipated to pressure the RBI to boost rates.
In June, India’s monthly trade deficit reached a record high of $25.64 billion due to rising import costs for coal and oil.
Additionally, the nation’s current account deficit is expected to increase to around 3 percent of GDP this fiscal year, which would be the highest since 2012–13.
Since a post-pandemic growth recovery, the central bank and the government have switched their attention to inflation control since May.
The government has increased support for farmers through increased subsidies, reduced gasoline and diesel taxes, and several export restrictions.
In contrast, the RBI has increased policy rates by 90 basis points (bps) and raised its inflation target by 100 bps.
The Reserve Bank of India (RBI) has announced new steps to increase currency inflows to stop the decline in the value of the Indian rupee.
The RBI has offered a promotion for banks to increase their foreign deposit volume.
According to the RBI, banks will not be subject to CRR and SLR for deposits received under FCNR(B) foreign currency non-resident deposits.
The Reserve Bank of India (RBI) has set up a system that allows Indian traders to finalize their export and import payments in rupee.
The action will not only benefit the Indian rupee by reducing demand for foreign cash but also open up unrestricted trade with Sri Lanka.
The RBI implemented several measures last week to curb forex inflows to stop the rupee decline.
It has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR, the RBI stated in a circular on Monday.
This is done to promote the growth of global trade, with a focus on exports from India, and to support the growing interest of the global trading community in INR.
The rupee has recently experienced a severe decline due to high inflation, rising interest rates, and capital outflows, similar to most currencies used in emerging market economies.
Currently, 60 percent of export and import payments made by Indian businesses are made in U.S. dollars, followed by 5 to 10 percent made in rupees, and the remaining 30 percent made in foreign currencies, such as the euro.
Even though an Indian exporter receives rupees payments, the sovereign settlement level is conducted in dollars, with the individual dealer’s currency rate risk.
This is a timely step, as many nations are only permitting export-import transactions through letters of credit due to the severe cash crisis many nations in Africa and South America are experiencing.
Our exporters and importers will benefit from this.
However, exporters are unsure if they would be able to use the new rupee payment system to access tax refunds under other programs, such as duty drawback and RoDTEP.
Although a rupee-rouble arrangement was originally contemplated to provide quick payments to local exporters who supply Russia, this hasn’t worked out due to growing Western concerns.
Even though the trade between Russia and India is now being hindered, Russian exporters to India are now open to accepting payments in rupees.
India believes that since the new additional rupee payment system is not country-specific, it will avoid the sanctions.
The RBI claims that authorized dealer banks will need permission from their foreign currency department to use the new payment system.
Under the terms of this agreement, all exports and imports may be valued in rupees and invoiced in that currency, with the exchange rate between the currencies of the two trading partners being set by the market.
Under this agreement, trade transactions must be settled in rupees per the prescribed process.
A bank in India may open a specific Vostro account of correspondent banks of the partner trading countries to settle trade transactions with any country.
When using this settlement method, Indian importers must pay in rupees against the invoices for the supply of goods or services from the overseas seller/supplier.
Payment must be credited into the special Vostro account of the correspondent bank of the partner country.
Similar to this, the balances in the authorized special Vostro account of the correspondent bank of the partner country will be used to pay Indian exporters their export revenues in rupees.
Through this arrangement, Indian exporters may also collect advance payments in Indian rupees from foreign purchasers against exports.
For this, Indian banks must ensure that the funds in these accounts are initially used to fulfill commitments resulting from recently completed export orders or upcoming export payments.
The Indian bank managing the special Vostro account of its correspondent bank shall, in addition to the usual due diligence procedures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance to ensure that it is only released per the instructions of the overseas importer.
The major goal of the circular is to facilitate Russian trade payments.
