The rupee on Wednesday crossed the 90-mark against the US dollar for the first time and fell six paise to 90.02 in early trade. Forex dealers said banks continued to buy US dollars at high levels and foreign capital inflows put pressure on the rupee. However, a weaker dollar and a drop in global crude prices limited the sharp decline.
The rupee opened at 89.96 against the dollar at the interbank foreign exchange market. During the trade, it fell to a record low of 90.15 per dollar but later recovered slightly to 90.02, down six paise from its previous close. On Tuesday, the rupee closed at an all-time low of 89.96 per dollar, down 43 paise.
Meanwhile, the dollar index, which measures the greenback’s strength against a basket of six major currencies, fell 0.13 per cent to 99.22. On the domestic stock market front, the Sensex fell 165.35 points to 84,972.92 and the Nifty fell 77.85 points to 25,954.35 in early trade.
International benchmark Brent crude oil fell 0.03 per cent to $62.43 a barrel. According to stock market data, foreign institutional investors were net sellers on Tuesday, selling shares worth Rs 3,642.30 crore.
However, the rupee’s breach of the 90-mark against the US dollar will have a significant impact on the Indian economy. This is the main purpose of this column.
Key Impact on the Economy
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Inflation
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India may import most of its crude oil requirements. The appreciation of the dollar will require more money to buy oil.
This will increase the prices of petrol, diesel and other petroleum products. Transportation costs will increase, making everything more expensive, which will directly affect the pockets of the common man.
Along with this, electronics, machinery, medicines, gold and other imported goods will also become more expensive.
Higher import bill and trade deficit
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A weak currency makes imports more expensive, which increases the country’s overall import bill.
This could further widen the trade deficit, which is a worrying sign for the economy.
Pressure on foreign investment
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Foreign institutional investors (FIIs) may continue to withdraw capital from the country (as you mentioned, they have been selling).
When foreign investors withdraw funds in dollars, they convert their money into dollars, which creates further selling pressure on the currency and could weaken it further.
Impact on corporates
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Indian companies that borrow in dollars will now find it more expensive to repay their loans.
The cost of importing raw materials will increase, which could affect their profits.
Limited positives
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Increased exports
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A weaker currency can make Indian exporters’ goods more competitive in foreign markets. When they get paid in dollars, they get more money in return.
However, this will only be beneficial if global demand is strong.
Increase in remittances
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When Indians working abroad send money back to their families (remittances), they will receive more money than before.
Tourism
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Visiting India will become cheaper for foreign tourists, which could increase tourism in the country.
Conclusion
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In short, this historic devaluation of the currency will mainly increase inflation and make imports more expensive, which will have a negative impact on the general consumer and import-dependent industries. It will also make foreign investors wary. The Reserve Bank of India (RBI) can intervene by selling dollars to control this fall, but this is a challenging time.
