Rupee Breaches 84 Against US Dollar Amid High Oil Prices and FII Outflows: Economic Concerns Deepen
India’s financial markets are facing a turbulent period as the rupee plunged past the 84 mark against the US dollar for the first time on October 11, 2024. This decline is driven by a combination of surging global crude oil prices and substantial Foreign Institutional Investor (FII) outflows from Indian equities. The rupee closed at 84.06, a record low, raising concerns about inflation and its broader impact on the Indian economy.
Key Drivers of the Depreciation:
1. Rising Oil Prices: The ongoing Middle East geopolitical tensions, particularly the Israel-Gaza conflict, have disrupted crude oil supplies, pushing Brent crude prices up by more than 10% in October alone, now hovering around $79 per barrel. As India imports nearly 85% of its oil, higher oil prices exacerbate the country’s trade deficit, putting immense pressure on the rupee. Importing oil at elevated costs increases India’s dollar outflow, weakening its currency further.
2. FII Outflows: October saw an exodus of foreign investors, with FIIs selling over ₹55,000 crore worth of Indian shares in a span of just a few weeks. The withdrawal is partly due to global economic uncertainties, rising US Treasury yields, and more attractive returns in developed markets. This large-scale sell-off puts additional pressure on the rupee as investors convert rupee holdings into dollars.
3. Global Monetary Policies: The possibility of continued monetary tightening in the US has made the dollar more attractive, further weakening the rupee. The Federal Reserve’s stance on potentially delaying interest rate cuts means global investors are shifting their capital to safer assets, causing increased pressure on emerging market currencies like the rupee.
Economic Impact:
1. Inflationary Pressures: A depreciating rupee significantly affects import-dependent sectors, particularly crude oil, which could fuel domestic inflation. Higher oil prices lead to increased transportation and production costs, ultimately passing the burden onto consumers. Rising inflation in an already fragile economy could reduce consumer purchasing power, slowing economic growth.
2. Impact on Trade Deficit and Current Account: India’s current account deficit, which widened to 1.1% of GDP earlier this year, is expected to increase further with a weakening rupee and rising oil prices. A larger trade deficit puts downward pressure on the rupee, creating a vicious cycle of currency depreciation.
3. Foreign Debt and Investments: A weaker rupee increases the cost of servicing foreign debt for companies with dollar-denominated loans. This may lead to higher interest payments and reduced profitability, especially in sectors reliant on imports like technology, manufacturing, and energy.
4. RBI’s Role: The Reserve Bank of India (RBI) has been stepping in to prevent a sharp decline in the rupee by selling US dollars from its reserves. However, economists warn that persistent intervention could deplete reserves and limit the RBI’s ability to control further depreciation. Despite this, the RBI is expected to continue interventions in the short term to prevent extreme volatility.
Outlook:
The rupee may remain under pressure in the coming months, with predictions suggesting it could fluctuate between 83.5 and 84.5. The RBI’s interventions, alongside potential changes in global oil prices and foreign investor sentiment, will be crucial in determining the rupee’s trajectory. In the absence of significant stabilization measures, the rupee’s depreciation could further strain India’s economic recovery and complicate inflation management.
