Depreciation in Indian Rupees

Depreciation in Indian Rupees

Why in News?

  • Recently, The Indian Rupee depreciated by around 10% against the US dollar and the rupee was the worst-performing Asian currency in 2022.

Highlights

  • This decline was mainly on account of appreciation in the US currency on safe haven appeal amid fears of recession and inflation across many parts of the world and Russia-Ukraine war.
  • The rupee fell to a lifetime low of 83.2 against the dollar. Compared to rupee, depreciation of other Asian currencies was to a lesser extent.
  • During the year, the Chinese Yuan, Philippine Peso and Indonesian Rupiah fell around 9%. South Korean Won and Malaysian Ringgit declined by nearly 7% and 6%, respectively.
  • However, the Reserve Bank of India (RBI) heavily intervened in the forex market to defend rupee. Since the beginning of 2022, the country’s foreign exchange reserves have fallen by USD 70 billion. It stood at USD 562.81 billion as of 23rd December 2022.
  • Reserves have witnessed a bit of erosion but the central bank is now starting to again build up its reserves and that would act as a buffer in times of uncertainty.
  • The Reserve Bank of India (RBI) heavily intervened in the forex market to defend rupee. Since the beginning of 2022, the country’s foreign exchange reserves have fallen by USD 70 billion. It stood at USD 562.81 billion as of 23rd December 2022.
  • Reserves have witnessed a bit of erosion but the central bank is now starting to again build up its reserves and that would act as a buffer in times of uncertainty.
  • The US Fed aggressively raised interest rates by 425 basis point (bps) in 2022 in its fight against inflation. This led to a higher interest rate differential between the US and India, and investors pulled out money from the domestic market and started investing in the US market to take advantage of higher rates.
  • In 2022, Foreign Portfolio Investors (FPIs) pulled out Rs 1.34 lakh crore from the Indian markets – the highest-ever yearly net outflow.
  • They withdrew Rs 1.21 lakh crore from the stock markets and Rs 16,682 crore from the debt market in 2022, putting pressure on the rupee.
  • Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows tougher.
  • Even though the outlook on the rupee remains weak in the near future, the depreciation in local currency may not continue for a longer period as India remains the fastest-growing economy.
  • The terminal Interest rate for the US Fed was anticipated, but it cannot be the case that their monetary policy will be tightened endlessly.
  • When the (US Fed) tightening is over, the tide will surely turn.
Share Socially