Recently, we’ve witnessed a surge of headlines highlighting the depreciation of the Indian rupee. This past month alone, our currency experienced its most significant monthly depreciation.
So, what’s causing this decline?
The Dominance of the US Dollar
The primary driver behind this phenomenon lies in the continued dominance of the US dollar. This supremacy is rooted in its pivotal role as it’s pegged to most currencies and is the standard for crude oil transactions, constituting a staggering 79% of global transactions.
At its core, the value of the Indian rupee relative to the US dollar is governed by the principles of supply and demand. When the demand for US dollars surges, the value of the Indian rupee diminishes, and conversely, when demand recedes, the rupee gains strength.
Impact of Rising Oil Prices and US Dollar Strength
The price of oil plays a significant role in this equation. As oil prices escalate, India is compelled to allocate more dollars for imports, driving up the demand for the dollar and subsequently causing the rupee’s depreciation.
Escalating Oil Prices
Oil prices have recently breached the $90 per barrel threshold, marking a one-year high. This surge can be attributed to extended supply cuts from Russia and Saudi Arabia. This is a substantial blow to the rupee, considering that over 80 percent of India’s crude oil is imported.
Strengthening of the US Dollar
The US dollar’s recent surge can be attributed to the US Federal Reserve’s contemplation of additional rate hikes to counteract inflation. Consequently, yields on US bonds experienced an uptick, rendering the dollar more appealing to global investors. This strengthening of the dollar, in turn, adversely impacts the rupee.
Depreciation of the Chinese Currency
Another factor in play is the devaluation of the Chinese currency. Concerns about China’s economic stability have led to a decline in value. This shift in investor sentiment prompts a migration towards safer assets such as US government bonds. This, in turn, fortifies the US dollar, further weakening other currencies.
Role of RBI
One might wonder if the Reserve Bank of India (RBI) can intervene to stabilize the rupee with its substantial dollar reserves. While the RBI can step in to sell some US currency in the exchange market, it primarily aims to iron out volatility rather than dictate the rupee’s value.
The RBI’s Role
The Reserve Bank of India (RBI) can intervene by selling US currency to stabilize the rupee, but its primary purpose is to manage volatility, not dictate the rupee’s value.
- Global and domestic factors influence the rupee’s depreciation against the dollar.
- Some factors can be managed internally, while others are beyond India’s control.
- India actively promotes the use of the rupee in international trade.
The depreciation of the rupee against the dollar is a complex interplay of various global and domestic factors. While some of these factors can be managed internally, others, like global economic factors, are beyond our control. India’s active efforts to promote the use of the rupee in international trade are commendable.
However, breaking free from the stronghold of the US dollar may not be easy. The dollar’s reputation as a haven currency and its widespread acceptance globally present significant challenges. Transitioning away from its dominance will require a meticulous strategy and sustained effort.
How do rising oil prices impact the value of the Indian rupee?
Rising oil prices increase demand for US dollars as India must allocate more for oil imports. This, in turn, causes a drop in the rupee’s value.
What role does the Reserve Bank of India (RBI) play in stabilizing the rupee?
The RBI can intervene by selling US currency to stabilize the rupee, but its primary purpose is to manage volatility, not dictate the rupee’s value.
Why is the depreciation of the Chinese currency relevant to the rupee’s value?
The devaluation of the Chinese currency prompts a shift in investor sentiment towards safer assets like US government bonds. It strengthens the US dollar, weakening other currencies.