Indian Rupee Hits All-Time Low Against US Dollar: Causes and Implications

Recently, the Indian rupee has seen a huge devaluation and touched a new low of 86.6475 against the US dollar. This fall has been alarming for economists, policymakers, and even the common public. Knowing what has led to this fall will be very helpful in knowing how this could impact India’s economy.

Factors Contributing to the Rupee's Depreciation

US Dollar Strength: The US dollar has appreciated due to better economic conditions and anticipation of the Foreign Portfolio Outflows: The foreign investments have been significantly withdrawn from the Indian markets. As of now, in January alone, the foreign investors pulled out some $6 billion from the Indian stocks and bonds. Such outflows put in more demand for the US dollar, creating a depreciation of the rupee.

Foreign Portfolio Outflows: The foreign investments have been significantly withdrawn from the Indian markets. As of now, in January alone, the foreign investors pulled out some $6 billion from the Indian stocks and bonds. Such outflows put in more demand for the US dollar, creating a depreciation of the rupee.

Rising US Treasury yields have made U.S. treasury yields attractive; hence, most investors are withdrawing capitals from emerging market countries such as India. Capitals withdrawal has in turn contributed towards the weakening rupee.

Decline in Forex Reserves: India’s Forex Reserves Shrink for Sixth Week in a Row, Reaches 10 Month Low at $625.87B. As of January 10, 2025, the forex reserves had decreased to a 10-month low of $625.87 billion. The RBI is limited in its effectiveness to intervene in the forex market to stabilize the rupee.

Implications of the Rupee's Depreciation

Increased Import Costs: Since the rupee is weak, it becomes relatively expensive to import crude oil and electronics, machines, and whatnot. So, these lead to increased prices of domestic consumption.

Effects on the Hedging of Importers: Indian importers using the ‘seagull’ option hedging strategy are getting a jolt with the steep plunge of the rupee. While being a low-cost hedging strategy during times of stability, this hedging strategy is proving costly at the present juncture due to the rupee’s volatility.
PRESSURE ON THE CURRENT ACCOUNT DEFICIT:The rise in the cost of imports can increase the current account deficit, thus adding pressure to the Indian economy.

RBI's Response and Future Outlook

The Reserve Bank of India has actively interfered with the exchange market to control the rupee’s extreme volatility. However, with a reduction in forex reserves, its ability to control the currency’s depreciation is also constrained.

Analysts expect the rupee to weaken further, which may reach as low as 86.90 against the US dollar. But it is believed that the RBI will take all measures to stop the rupee from touching 87.

Conclusion

This decline of the Indian rupee to its lowest level ever against the US dollar is a complex phenomenon, determined by global economic trends, investor behavior, and factors related to the domestic economy. Though depreciation creates certain challenges, it also reflects the need for effective economic policies and proper market intervention to cope with such situations. Constant tracking and adjustment measures would be needed to reduce adverse impacts and sustain the economy.