How the rupee’s fall can impact the economy and what RBI can do about it
The rupee has fallen to a new low of 83.5 against the dollar. This has wide ramifications, making exports lucrative but imports expensive. Mint looks at why the currency is falling, how it impacts everybody and what can RBI do.
The value of the rupee fell to an all-time closing low of 83.54 against the dollar on Tuesday. It had gone even lower at 83.57 during intra-day trade but likely intervention by the Reserve Bank of India prevented a further slide. It ended with a 9 paise or 0.10% depreciation and was still one of the better performing currencies among Asian economies.
The Indonesian Rupiah depreciated 2%, Taiwanese dollar 0.34%, South Korean won 0.76%, the yen 0.28%, Thai baht 0.21% and yuan 0.18%. In the mid-term however, the rupee has now depreciated by over 9% in the last 2 years (see table). This is steeper than the long-term trend.
Geopolitical instability has a major impact on investors which, in turn, sets in motion a chain reaction ultimately affecting the value of a currency. The Iran-Israel conflict on top of the prevailing Israel- Palestine and Russia-Ukraine wars, could potentially disrupt global supply chains, leading to an increase in the prices of commodities, fuelling inflation. This in turn diminishes the chances of an interest rate cut by the US Fed—central banks raise interest rates to curb consumer spending.
Higher rates in the US encourage investors to move money from different parts of the world, including India, to the US. A weaker rupee makes imports expensive while it benefits exporters. Since India is a net importer of goods and services — it has a current account deficit of $9.2 billion in the first half of 2023-24 — a fall in the rupee hits a host of products from electronics and
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