In recent memory, the Indian rupee has had arguably the hardest past couple of years ever. On March 30, there was a volatile trading session where the rupee entered into the psychological zone of over $95 per US dollar, with a near close of $94.83 due to what is likely to have been the Reserve Bank of India intervening in the market. This move capped off a very difficult fiscal year for the rupee, with the largest annual decline (greater than 2011–12) in the last several years. The rupee’s decline shows us that the world is going through a very fragile time with there being global tensions and domestic economic pressures colliding.
A Record Low in a Turbulent Trading Session
The trading day for the rupee opened surprisingly strong at 93.59 USD / Rs; however, this strength dissipated quickly as global markets experienced volatility.
Within hours the rupee fell to an all-time low of 95.21 USD/Rs and left traders on edge due to the unanticipated magnitude of the move. As outlined by market participants, it would have fallen much further had it not been for the Reserve Bank of India intervening to stabilise the market.
Currency dealers believe that the central bank intervened in the market through the use of forward dollar sales to help bring the currency back up slightly by the end of the trading day, but overall damage had been done to their books for that fiscal year.
The Numbers Behind the Decline
The Indian Rupee has devalued by nearly 11% against the US dollar over the fiscal year ended March 2023. This is now considered one of the worst-performing currencies in an annual period since the extremely volatile era that followed the global “taper tantrum” of 10 years ago.
Specifically, several influencing factors that have put pressure on the Indian rupee include the following:
– The sustained selling of Indian Rupee-denominated securities by foreign investors
– Increasing global oil prices
– Escalated geopolitical tensions around the globe
– Changes in global capital flows
These four factors have combined to create a very difficult environment for currencies of emerging markets like India.
Foreign Investors Pulling Money Out
The constant reduction of investment from foreign investors withdrawing from the Indian equity markets has added tremendous stress to the Indian rupee; in fact, over the last year, foreign investors have sold off in excess of $19 billion worth of Indian equities, with a sharp increase in this outflow occurring in March of this year as global investors have become very conservative about investing in any of the emerging markets. Foreign investment or capital is a key foundation for the strength of the Indian rupee, and as it flows out of the country, the demand for dollars increases and, as such, causes the rupee to depreciate.
The trend of the flow of foreign investment out of the Indian rupee has coincided with increased uncertainty in the global financial markets created by Donald Trump’s policies in the United States.
Oil Prices Adding to the Pressure
This also contributes toward weakening our currency because, as we know, a large amount of energy is imported by us as oil, so if the price of oil goes up, then the price of importing will too because we must purchase barrels of oil through dollars (thus increasing demand for US dollars, putting downward pressure on our currency).
For example, in recent weeks, the price of Brent crude oil has risen from around US$ 100/barrel to about US$ 115/barrel due to Yemeni Houthi attacks increasing the regional conflict to include greater tensions between Israel and Iran.
As such, we expect that increased oil prices for the Indian economy will result in the following:
– increased cost of imports,
– increased inflation, and
– increased trade deficit,
which all serve to bring additional pressure on weakening our currency.
RBI Steps In With Emergency Measures
In order to create a more settled market, the Reserve Bank of India‘s unexpected limit on foreign currency positions taken by banks has caused traders to liquidate some of their arbitrage trades and temporarily stabilised the rate of exchange during Monday’s trading session. Nevertheless, analysts warned that these types of actions only afford temporary assistance and that the fundamental pressures on the rupee are still mostly unchanged at this moment.
Why Analysts Think the Rupee May Fall Further
A great many economists are of the opinion that the rupee will remain on the back foot for some time to come.
Barclays analysts stated, “Restricting currency limits does not alter the fundamental elements that will see rupee depreciation.” The following factors will keep pushing down the rupee:
The continued capital outflow from India
An increase in oil prices
A declining balance of payments
Geopolitical tensions globally
A Fragile Moment for the Currency
The Indian rupee has experienced significant declines. However, it is not among Asia’s worst-performing currencies, as evidenced during this latest global economic crisis. Indeed, the Reserve Bank of India has intervened often enough to slow down what might have otherwise been a much more significant collapse of the rupee than we have seen.
At the same time, the message from global markets is clear – the Indian rupee will continue to traverse difficult waters.
With geopolitical instability remaining a significant threat to global investor confidence in the near term, and global investors continuing to re-evaluate the amount of risk that they are willing to take, the next few months will be as difficult for the Indian rupee as were the last twelve months.
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