Rupee Hits Record Low Against US Dollar Amid FPI Selloff, Rising Oil Prices
Two major factors have contributed to the rupee's slide: sustained FPI outflows and the global surge in crude oil prices
The Indian rupee reached a historic low on Friday, breaching the 84-per-dollar mark for the first time, as persistent selling of domestic equities by foreign portfolio investors (FPIs) and rising crude oil prices exacerbated pressure on the currency. The rupee depreciated to an intraday low of 84.10 against the US dollar before closing at 84.07, following a previous close of 83.98 on Thursday. This marked the weakest level for the Indian currency since it first breached the 83 mark nearly two years ago, in October 2022.
Two major factors have contributed to the rupee's slide: sustained FPI outflows and the global surge in crude oil prices. FPIs have been net sellers in the Indian market, offloading nearly USD 6 billion worth of domestic equities in October alone. Additionally, FPIs pulled out USD 125 million from the debt market, further aggravating the pressure on the rupee. As foreign investors exit, demand for the US dollar rises, pushing the Indian currency lower.
Moreover, the rising cost of crude oil has added to the rupee’s woes. India imports over 80 per cent of its oil requirements, and any increase in global crude prices significantly impacts the country's trade balance and inflation. As oil becomes costlier, the import bill rises, leading to a higher demand for foreign currency, primarily US dollars, weakening the rupee.
Rupee’s Decline Over Time
The rupee’s fall to 84.10 on Friday represents a significant milestone, as it last touched the 83-per-dollar mark on October 19, 2022. The currency has been on a downward trend since then, recording its previous low of 83.99 on September 12, 2024. So far, in the current financial year, the rupee has depreciated by 0.8 per cent against the US dollar. This makes it the third-worst performing currency in Asia, behind the Bangladeshi taka and the Philippine peso.
A weaker rupee raises concerns across several sectors of the Indian economy. For one, it makes imports more expensive, especially crucial commodities like oil and gas, which could lead to higher inflation. Industries reliant on imported goods, such as electronics, machinery, and chemicals, may also face increased costs. Conversely, a weaker rupee could benefit exporters, as Indian goods become more competitively priced in global markets.
However, the depreciation also puts pressure on the Reserve Bank of India (RBI) to step in and stabilise the currency. The RBI may need to intervene by selling US dollars from its reserves to curb volatility and prevent excessive depreciation. Despite this, the central bank has to carefully balance its efforts to avoid depleting foreign exchange reserves too quickly.
