The rupee has shown a lot of irregularities since January,2022. The Rupee stood 73.77 against the Dollar on 12th January,2022 and since then it is in downward trend. On 16th May,2022, the Indian rupee fell to an all-time low of 77.81 against the previous low of 76.98 against the USD.
The increase in the rate hike by the Fed earlier this week by 50 bps has created a huge demand for USD in local markets. Foreign investors are pulling their money out of the Indian stock market owing to greater demand for USD. The outflow of foreign investors has pulled 1.5 lakh crores so far from the Indian stock market. This has caused a huge gap to be filled by domestic investors.About one-fifth of India's total imports are accounted by crude oil. Because of the Russia-Ukraine war, crude oil prices have skyrocketed. The cost per barrel has broken all records after the 2008 recession and came to a high of $123.70 in the year 2022.This has caused the strengthening of the USD and caused a major concern in the current account deficit of India.
It is expected to hit a 10 year high of 3.3% of GDP this year, causing the rupee to fall even more.While China and Japan are unable to adjust their monetary policy according to the US federal rate hike, it has drastically affected the value of their currencies along with major Asian currencies.
Performing poorly, the rupee was bound to be affected.The lockdown in China has made it difficult to deal with a lot of companies, which has caused the yuan to depreciate further, affecting sentiments of emerging market currencies.Economists believe the dollar is strengthening not only as a result of aggressive Fed policy, but also as a result of weak rising sentiment. There is a greater risk in the market because of the Russia-Ukraine war and a tighter lockdown in China. Therefore, the significance of safe currency in a changing world increases.Food inflation, which accounts for almost half of the Consumer Price Index (CPI), has been increasing in multilevel due to the global rise in the price of vegetables and cooking oil. A global supply shortage has caused the inflation level to reach an all-time high.Wholesale price index of India also jumped to an all-time high of 15.1% in April 2022 compared to the previous 14.6% in March 2022.All these factors are putting pressure on emerging markets like India causing them to depreciate against the USD.
To ensure the safety of the rupee, the Reserve Bank of India has started selling large chunks of foreign reserves. The $642.5 billion foreign Reserve has fallen to $597.7 billion because of selling. There is a continuous fall in weekly foreign Reserve. The Reserve Bank of India also increased the repo rate by 40 basis points, changing from 4% to 4.40% and CRR increased by 50 basis points (4.5%) to tackle inflation among the falling rupees.Feweconomists believe that the rupee will continue to lose as there is a significant difference in long-term inflation between India and the USA. On the other hand, someeconomistscontend that value of the rupee will rise again through intervention of tools of monetary policy.
(Gupta is Assistant Professor, Department of Humanities and Management Science and Kansal is in Computer Science Junior Year, Madan Mohan Malaviya University of Technology, Gorakhpur, India. The views expressed are personal.)
