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Why is Rupee Falling Against US Dollar? Will It Drop Further in FY23? Explained

The rupee has gained 7 paise in the early trade on Friday.

The rupee has gained 7 paise in the early trade on Friday.

Dollar index, which measures American currency's strength against basket of 6 currencies, stands higher at 102.86; while crude oil is trading at $111.59/barrel

The Indian rupee has been weakening for quite some time and the fall continues with the domestic currency hitting its fresh all-time low of 77.72 against the US dollar on Thursday. Although the rupee has gained 7 paise in the early trade on Friday, the pressure of FPI selling and the impact of tight monetary policy globally persist.

The Rupee Fall In Recent Times

The rupee has seen volatility in the past few months. The local currency had stood at 73.77 to a dollar on January 12, 2022, and since then it has fallen about Rs 4 and touched 77.72 on Thursday. However, the fall has not been continuous since January 12. First, it weakened between January 12 and March 8 to hit 77.13 and then started strengthening till April 5 to touch 75.23 to a dollar. Since April 5, the rupee has seen a continuous fall and has touched all-time lows multiple times since then.

Why Is The Rupee Falling?

The Indian currency has been weakening as compared with the US dollar due to the outflow of foreign investments led by global uncertainties arising out of a geopolitical crisis on the Russia-Ukraine war and tight monetary policy by US Federal Reserve. The fall is also attributed to surging crude oil prices and general dollar strength.

India Ratings and Research in its note said rising inflation in advanced economies has prompted global central banks to not only withdraw the ultra-loose monetary policy but also raise their policy rates even before the RBI’s policy action on May 4, 2022. The US Fed raised its policy rate by 25 basis points (bps) for the first time in March 2022 after a gap of more than three years and followed it with another 50 bps rate increase in May 2022.

“As expected, the monetary tightening by the US Fed has triggered a portfolio investment outflow. Till May 16, foreign portfolio investors had pulled out USD 21.2 billion from India. This, besides a higher import bill, has put sudden pressure on the Indian rupee and forex reserve,” it added.

Mehta Equities Vice-President (Commodities) Rahul Kalantri said the rupee has been witnessing the fall on account of persistent foreign fund outflows, surging crude oil prices, and general dollar strength.

Foreign institutional investors were net sellers in the capital market on Thursday as they offloaded shares worth Rs 4,899.92 crore, as per stock exchange data. The dollar index, which measures the American currency’s strength against a basket of six currencies, currently stands higher at 102.86; while crude oil is trading at $111.59 per barrel.

The Rupee Fall’s Impact

The fall in the rupee is making imports costlier and stoking inflation in the country, which is already out of the RBI’s comfort zone of 2-6 per cent. So, sectors such as fast-moving consumer goods (FMCG), metal and banking, among others, are at the receiving end. However, export-oriented sector stocks such as IT, pharmaceuticals, specialty chemicals and textiles can be better bets during the rupee fall as a weaker rupee can boost exports.

Rupee Prospects

Experts are expecting the Indian rupee to hit 78.19 per US dollar in FY23.

India Ratings said, “As this (the factors causing the rupee fall) is unlikely to reverse any time soon due to volatile commodity prices and persisting global supply disruptions caused by the Russia-Ukraine conflict, Ind-Ra believes the Indian rupee to depreciate by 4.9 per cent and average 78.19 per USD in FY23.”

Anindya Banerjee, vice-president (currency derivatives & interest rate derivatives) at Kotak Securities, said Since the RBI policy on May 4, the rupee has flipped from being an outperformer to an underperformer. The RBI remains an aggressive sellers of US dollar in spot and forward markets. The sharp plunge in forward premium is an evidence of that.

“Going forward, dollar-rupee can continue to drift upward at a slow pace. We expect a broad range of 77 and 78.30 over the near term,” Banerjee added.

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first published:May 20, 2022, 13:00 IST