Planning to get the iPhone 14 in the coming months from your cousin in the United States? Time to realign your mental calculations from 70 to 80 to figure out the INR value that you will have to wire him/her. The rupee has been steadily falling with no signs of revival in near future. The Indian currency touched 79.37/Dollars during the weakest ever session and fell over 5.4% since the start of the year because of evolving concerns like rising trade deficit owing to high crude oil prices, foreign investors pulling out money, interest hikes in the USA, inflation owing to supply chain concerns from the never-ending Russia-Ukraine conflict.
First, let’s understand the dynamics of how a currency like INR fall against another currency, USD is the case here –
The easiest way to understand this is to draw an analogy with any normal good, let’s say onions, almost every year during months from October to December we hear instances of massive price rise in the commodity, the reason behind it is simple, the demand for onions during such days far outweigh the supply of it, the same case applies to currencies for any country when the demand for a currency (because of the country’s fundamental conditions) falls, market participants degrade the value of it and thus one needs to pay higher per-unit cost while exchanging it for any other nation’s currency.
But, why does the demand for INR fall in the first place? The fall can be broadly associated with the following reasons
Rising Trade Deficit India has been a long net importing country meaning it demands goods in the foreign currency more than it sells in domestic currency, which implicitly reduces the demand for the Indian Rupee, this has become even more concerning now as the trade deficit keeps widening primarily due to elevated crude oil prices as a by-product of Russia-Ukraine conflict. The latest figures as per the Ministry of Trade & Commerce shows the trade deficit widening by 1215% YoY from +1.38 USD Bn in May 2021 to -15.44 USD Bn in May 2022.
Foreign Institutional Investors quitting India National Securities Depository Limited (NSDL) compiled data shows FIIs pulling out a whooping USD 33.5 Bn from equities and USD 2.1 Bn from debt segments over the period October 2021 to June 2022. Such a magnitude has never been witnessed before, not even during the 2008 Global Housing Crisis.
Capital outflow at such a massive scale dents currency’s value to a great extent. When Foreign Portfolio Investors invest in Indian equity and bond markets, the returns are measured in Dollars, such case if the rupee depreciates against the USD, the value of the investment also plunges in-turn nudging FPIs to engage in distress sale of funds. A part of the reason for the outflow of money from Indian markets has also to do with investors finding a haven in developed economies, recent interest hikes by Fed incentivize investors to get more returns in a less risky economic environment.
Strengthening Dollar Index (DXY) – The dollar index which measures the value of the US Dollar against currencies like the Euro, Swiss, Franc, Yen, Canadian Dollar, Pound, and Swedish Krona has been at strong levels since the start of the year. The index measures the strength of USD in global markets, meaning, that when DXY rises, the value of all dollar-denominated assets also rises, benefitting American firms, US Bonds, etc. whereas on the split side this in-turn comparatively hampers other economies, particularly those in emerging markets as investors tend to flee much quicker given the risk spreads.
At such a juncture, it would be unfair to not evaluate Rupee’s comparative performance against the USD visa-a-vis other major currencies. While Indian Rupee has fallen by 5.4%, other major economies like China, Canada, the EU & Japan fell by 3.4%, 4.7%, 13.9%, and 18.5% respectively.
Read More at https://www.financialexpress.com/opinion/rupee-approaching-80usd-time-for-damage-control/2587814/
Comments