Why is Indian Rupee and other currencies depreciating against US Dollar?

New Delhi: For the first time in 20 years Indian Rupee is edging the 80 mark against the US Dollar. The citizens are stuck amidst the the ways to inherit a common opinion regarding this historical event. There are justifications that are being rolled from various sources across the internet as well as through the academia.

Here we are trying to portray substantial statistical outlay through the time in history, catching the various stages of appreciation and depreciation of INR and USD. This will help us to have a clear perspective regarding the current prospects of Indian Rupee relative to the rise and fall with the value of US Dollar.

Appreciation of the US dollar against the Indian rupee in 2022 – a comparative and historical perspective

• One US dollar bought Rs.74.50 at the end of last year. As of 15th July, it buys Rs. 79.74. The US dollar has strengthened by about 7% in the course of 2022.

• The strength of the US dollar has been uniform this year. It has appreciated against many other currencies. The US dollar index against six major currencies – Euro, British pound, Japanese yen, Swiss franc, Canadian dollar and the Swedish krona – has gained 13.0% this year.

• So, the strength of the US dollar against the Indian rupee cannot be viewed as an isolated case. It is just part of the strength of the US dollar globally, against all currencies – developed or emerging.

• The strength of the US dollar is due to the change in attitude towards risk taking in financial markets. When interest rates are low and dollar supply is ample, investors take risks. They invest in the stock markets of emerging economies like India. Indian stock markets gained a lot in 2020 and in 2021 because of that willingness to take risks on the part of international investors.

• Since the second half of last year, inflation rates began to rise in the developed world, including in the United States. Their central bank began talking about responding to high inflation. From March this year, they actually began raising interest rates.

• In February, the conflict in Ukraine broke out. That raised the price of oil and also raised uncertainty. On account of both these reasons, investors turned cautious. When they become cautious, they begin pulling money out of emerging markets like India. Foreign investors have pulled out nearly USD31.5bn totally from the beginning of 2021-22 and up to July 15th in 2022-23.

• The rise in the price of oil has also pushed up our import bill this year compared to last year. That means more demand for US dollars to pay for crude oil.

• All these factors have contributed to the strength of the US dollar against the Indian rupee. But, to reiterate, the US dollar has not strengthened only against the Indian rupee but also against many currencies, including other major currencies. In fact, the US dollar has strengthened more against those currencies than against the Indian rupee.

• In other words, the rupee has strengthened against the Euro, the Japanese yen and the British pound in 2022.

• Compared to previous occasions of dollar strength such as in 2013 (‘Taper Tantrum’) 2008 (global financial crisis) and 1997-98 (Asian financial crisis), this time, the strength of the dollar against the Indian rupee has been much more muted.

o In 2013, from 3rd May to 28th August, the US dollar strengthened from 53.65 to 68.80 rupees, appreciation of 28% of the US dollar.

o In 2008, from February to October, the US dollar strengthened from 39.12 Rupees to 49.96 Rupees, 28% appreciation of the US dollar.

o Between August 1997 and August 1998, the US dollar strengthened by 22% against the Indian rupee.

• Even though the strength of the US dollar against the Indian rupee has been quite mild, the Indian government and the central bank have been taking steps to attract dollar inflows, to make the appreciation of the dollar against the Indian rupee more gradual and smoother.

• The Reserve Bank of India regularly monitors the foreign exchange market and intervenes in situations of undue volatility. For its interventions, it uses its foreign exchange reserves which continue to be at comfortable levels.

• Many steps have been taken by the RBI on 6th July 2022 to ease the inflow of foreign exchange into the country. Some of these measures include the following:

o Incremental FCNR(B) and NRE deposits are exempted from the maintenance of CRR and SLR till November 4, 2022.

o Banks have been allowed to offer higher interest rates on fresh FCNR(B) and NRE deposits than those on comparable domestic term deposits for the period up to October 31, 202,2 to attract more of such deposits.

o Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks by utilising overseas foreign currency borrowing (OFCB) has been allowed for a wider range of purposes (earlier it was allowed only for the purpose of export finance) till October 31, 2022. This is subject to the negative list set out for external commercial borrowings (ECBs). The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets.

o Under the automatic ECB route, eligible borrowers are allowed to raise funds through their AD banks, without approaching the RBI. It has now been decided to temporarily increase the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion. The all-in cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment grade rating. The above dispensations are available up to December 31, 2022.

o In order to promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, RBI on July 11, 2022, has put in place an arrangement for invoicing, payment, and settlement of exports/imports in INR.

• Further, the Government in early July imposed a windfall tax on domestic crude oil producers, imposed export duties on petrol, diesel and aviation turbine fuel (ATF), and hiked the import duty on gold in an effort to reduce pressure on the rupee.

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