Last Updated on Dec 22, 2022 by
Rupee depreciation means falling currency value. The Indian Rupee had continually declined against the USD when India gained independence in 1947.
The Rupee has fallen more than 11% since the start of the year, with the Indian Rupee crossing the much-dreaded 80 mark in July and then hitting record lows, touching 83 a dollar late in October for the first time ever.
Table of Contents
Why is the Rupee falling?
The value of the Indian Rupee against the US dollar works on the basis of supply and demand. When the demand for the US dollar increases, the Indian Rupee depreciates and vice versa. When a country imports more than it exports, the demand for dollars exceeds the supply and local currencies such as the Indian Rupee.
Now the question arises, “Is the dollar strengthening or the Rupee weakening?” Is it due to the good performance of the USD or due to the bad performance of the INR?
The strength of the US dollar, the high price of crude oil and international capital outflows are the main causes of the decline of the Rupee. A stronger dollar and weak domestic growth prospects are prompting investors to flock to safe-haven greenbacks and dump riskier Indian assets. The US dollar is considered a safe haven currency. The US dollar appreciated as global investors flocked to the safe-haven currency, with the US Federal Reserve tightening more than its peers. Risk aversion in global markets means the money is now flowing back to the United States.
The Rupee is declining against the dollar, largely due to a widening trade deficit, with imports growing much faster than exports. The increase in imports is mainly due to the sharp rise in crude oil prices followed by the Ukrainian crisis. The increase in coal and other commodities, especially raw materials, has inflated the import bill. A weaker Rupee will make these imports more expensive, negatively impacting domestic production and overall GDP in the short term. Higher imports and lower exports mean higher demand for the US dollar and lower demand for the INR.
But is the Rupee really going down?
Over the past year, the Rupee has weakened against the dollar but strengthened against all major currencies. This indicates that the Rupee is not decreasing. Let’s review the performance of these currencies against the dollar-to-dollar index. The Dollar Index measures the dollar’s relative performance against six major world currencies, including the GBP, euro and yen.
October 2021: USD value against 6 major currencies = 93
October 2022: USD value against 6 major currencies = 112
This shows that the Rupee is not depreciating but that the dollar is currently strengthening. Despite this, the Indian Rupee is fighting bravely and performing well against other currencies.
Impact on the stock market
An appreciating Rupee value indicates a robust economy. But it may result in a dip in the stock market. Let’s understand how-
If the Rupee price rises, primary industries such as IT and exports will suffer. The IT sector has been hit hard as a significant portion of its revenue comes from the export of its services. Usually, people associate the depreciation of the Rupee with economic difficulties. If this is partially true, you may find that stock market performance improves in this situation. Indeed, export-dependent companies benefit from the decline in the value of the Rupee and post significant profits.
On the other hand, the stock prices of companies that rely on imports may fall. The depreciating Rupee makes imports costlier. Hence, companies relying on imported raw materials, capital-intensive sectors, and foreign borrowing are hurt the most.
However, it should be noted that the decline in the USD/INR rate has affected overall market sentiment and reduced foreign investment. Foreign investors are withdrawing from the market, which has an impact on the development of the stock market as a whole. The stock market is sensitive to global and domestic economic signals. So, when the value of the Rupee fluctuates, it affects investor sentiment and stock market performance. The currently nervous market and the weakening of the Rupee have had an impact on the Indian economy.
To sum up, there may be some obvious drawbacks to the depreciation of the Indian Rupee, such as higher import costs and the possibility of capital outflows, but at the same time, it also presents an opportunity for Indian industries to ramp up exports and replace imported Rupees. The depreciation of the Rupee also makes investment in foreign markets more attractive.
- Financial Planner and Why Do You Need One? - May 11, 2023
- Timing the Market: Is It a Wise Investment Strategy? - Mar 9, 2023
- How to Build an Investment Portfolio? - Feb 7, 2023
