The Indian Rupee hits a record low with the currency valued at 78.2825?against the US Dollar as it slips another 0.6% after a trail of falls over the last few months. This is the first time the rupee has crossed the 78-mark valuation as compared to the American bill, falling by 5% since the start of the year. Beginning at a 78.14 today after it closed at a 77.84 on Friday, the rupee is burdened with multiple external factors and a lack of suitable domestic effort to control the same.
The situation has tremendously affected the overall economy and stock and bond market, leading to higher and costlier imports and a lower investment.
The global geopolitical crisis at the peak of the Russian invasion of Ukraine has affected emerging markets globally with a 4-7% downfall in currencies. Indian currency has similarly faced a 4% depreciation ever since the Ukrainian crisis began in February 2022.?
The unending crisis and supply disruptions together with a stronger dollar index, surge in oil prices and dollar efflux from?equity and bond markets have increased the cost of the capital, leading FIIs to pull out their investments and weakening the rupee.
American monetary policies offering better interests widens the gap between foreign funds and affects the oil prices as well. The rising dollar index reflects that the USD is outperforming other currencies like Pound, Franc, Euro, Yen and Rupee. When the dollar rises it affects the pricing of all related commodities like the American shares and oil barrels and depreciates the value of currencies like the Indian rupee.
Foreign investment in the Indian equity market is an important determinant of the strength of the rupee. Whenever these investors become net sellers, Indian currency depreciates.
The Foreign Institutional Investors (FII) have shelled shares worth 3,793 crores this Friday pulling out 2,15,000 crores out of the Indian market this year, which is equivalent to their total investment over the last twelve years. This is caused due to the rising interest rates around the world which instigates the FII to pull out money from risky markets like India where the rupee is depreciating continually. The stronger Dollar index also discourages these investors from investing in emerging markets as the US is considered a safe haven for such investors compared to markets like India.
A weakened rupee makes imports costlier and affects the production costs, leading to rise in prices of goods and services and inflation in the market. The fall in foreign investment adds to inflation leading to higher and costlier imports against the exports, which is reaching out of the RBIĄ¯s comfort zone of 2-6 per cent.
India is dependent on oil imports to meet its energy requirements as oil prices increase it adds to the import costs for India. The stronger dollar against rupee makes oil imports costlier and the higher oil prices also affect the prices of all commodities. Globally brent crude oil prices went up by $12 over the last one month, leading to a 10-year high in the crude basket price.?
The effect of decline in Indian rupee has resonated at both the domestic equity markets where the top 30-stock Sensex was trading at 1,461.54 points or 2.69 per cent lower at 52,841.90, while the National Stock Exchange operated Nifty dropped 418.95 points or 2.59 per cent to 15,782.85.
The benchmark S&P BSE Sensex Index slipped about 2.8% as FII withdrew about $24 billion from the domestic stocks this year. Sovereign bonds also declined, with the yield on the benchmark 10-year bond rising by as much as nine basis points to 7.61%, while that on the four-year bond surged by 13 points. Traders will look forward to the release of inflation data later on Monday.
The Reserve Bank of India has sufficient reserves to manage the fluctuations, whereas hedging is a viable option for the importers to protect themselves, given the current hedging cost of 4% might limit the benefits.
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