The Indian rupee's depreciation against the US dollar has been ongoing for several days, and the rupee is constantly hitting new lows. However, it had a minor reversal in early trade a few days back and is now trading at 77.69. Unfortunately, this improvement is minimal after several days of deterioration. Stocks too dropped, with the Sensex Index falling 1.8 percent, a two-month low.

So what are the reasons behind the Rupee's depreciation?

Everything from oil to crucial electric items and machinery, as well as mobile phones, laptops, and other electronics, India is reliant on imports from other countries. The majority of mobile phones and gadgets are imported from China and other East Asian regions, with the majority of transactions taking place in US dollars. Imports will become more expensive in the country if the rupee continues to decline at this rate.

It will further mean that the household budget will be squeezed, which leads to extra expenditures for everything, from transportation, and cell phones to groceries.

A 50-basis-point rate hike by the US Federal Reserve, as well as predictions of more rate hikes in the coming months, are among the causes of this meltdown. Apart from that, foreign investors' continued selling of Indian markets is a big factor in its decline. The protracted war between Russia and Ukraine, as well as the geopolitical turmoil that has resulted from it, has put more pressure on the INR.

Experts claim that when international markets are volatile, investors flock to the dollar. When the demand for the dollar rises, the pressure on other currencies starts to shoot high.

When it comes to global uncertainty, there has been a supply interruption as a result of the pandemic and the ongoing war in Russia-Ukraine, which is causing turmoil around the world. During such uncertain times, people seek safe-havens, and the dollar is considered a safe shelter. Selling by foreign investors does have an impact on foreign exchange reserves, at the end of the day there’s a rising demand for the dollar while decreasing demand for the rupee.

A newspaper quoted experts as stating that the rupee could touch an all-time low of 81 versus the dollar in the coming days as the currency continues to decline.

The rupee's devaluation is projected to have an influence on the economy in general, as well as various components such as imports, particularly gasoline prices, and inflation. It is possible that the rupee will rise again after breaking through this level.

Why does the Rupee fluctuate in value?

Surging crude prices, foreign portfolio investors' withdrawal from Indian equities markets, wide dollar strength, and robust US bonds, according to currency experts, are among the causes for the rupee's weakening.

 According to analysts, the rupee's continued depreciation is irreversible in the near term since the core fundamentals of the Indian economy have deteriorated.

The money market, like any other market, operates on the demand and supply concept. The rupee depreciates when there is more demand for dollars than for rupees, and vice versa. The fluctuating exchange rate operates in this manner.

The simplest intervention that RBI, as the central bank may initiate to stop the rupee from falling is to sell dollars to lower demand, thereby strengthening the currency.

Most analysts are of the view that RBI recently sold additional dollars from its $600 billion in foreign reserves.

Final Thoughts

The Indian rupee's depreciation is increasing the cost of imports and fuelling inflation in the country, which is already above the Reserve Bank of India's 2-6 percent target. As a result, industries including fast-moving consumer goods (FMCG), metal, and banking, among others are suffering. Export-oriented sectors like IT, pharmaceuticals, specially chemicals, and textiles, on the other hand, may be better choices if the currency falls as a weaker rupee might enhance exports.

That's one scenario mentioned above. The other one is India's exports which benefit from a weak currency. For every rupee worth of commodities exported, the same rupee fetches more dollars. India, on the other hand, is a net importer of products, which means that it imports significantly more than it sells. Imports become more expensive due to the rupee's poor purchasing power. This contributes to the inflationary pressures significantly. As a result, the RBI strives to keep the rupee at a comfortable level of value: neither too strong nor too weak. That is the objective. However, this does not imply that things will work exactly the same way in the actual world.