Statsguru: Six charts explain falling rupee and how it impacts the economy

Rising crude oil prices and global liquidity tightening have significantly weakened the rupee.

It has been touching fresh lows for a while, ending the month of June at 78.97 against the US dollar. It closed at Rs 79.04 on Friday. The dollar exchange rate was close to Rs 74 at the beginning of the year (chart 1). The dollar has strengthened against most other currencies. But a comparison with emerging market peers shows that India’s currency has fallen more than many other countries (chart 2).

Domestic fundamentals may have played their part as did heavy foreign portfolio outflows (chart 3). Although foreign direct investment is in positive territory, foreign portfolio investors have been net sellers to the tune of a record $28 billion in equity markets in 2022. They were net sellers worth another $2.1 billion in debt instruments. Foreign investors are moving to safe haven dollar assets amid the recent market volatility. Rising interest rates in developed markets also reduce the relative attractiveness of investments in emerging markets like India.

Imports are going up faster than exports despite the falling rupee (chart 4). The current account deficit has largely been widening (chart 5).

The Reserve Bank of India has been defending the rupee and has lost a significant amount of foreign exchange reserves. They are down from $642 billion in October 2021 to $591 billion as of mid-June. Some of the decline could be on account of valuation loss amid a strengthening dollar, according to a note from rating agency Crisil.

India’s situation overall remains better than the “taper tantrum” days of 2013. But a falling rupee makes it more expensive to buy crude oil, which has been at more than $110 a barrel. More expensive fuel translates into higher inflation. Besides household budgets, corporate earnings may also get impacted.


 

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines