The Indian rupee experienced significant depreciation against the US dollar and other major currencies on August 5 and 6, 2024. This decline has been attributed to various economic factors, both domestic and international.
Key Figures and Trends
- Exchange Rates:
- On August 5, 2024, the Indian rupee hit a new low, trading at 83.7525 against the US dollar. By August 6, 2024, it further weakened to a record low of 83.9375.
- This decline continued a trend observed throughout the year, with the rupee consistently struggling against the dollar.
- Market Reactions:
- The stock markets mirrored the currency’s performance, with the BSE Sensex dropping 2,222 points on August 5, reflecting investor concerns over the rupee’s weakness and other economic uncertainties
Contributing Factors
- Economic Data and Policy:
- The depreciation was partly due to concerns about India’s economic outlook, including slowing growth and persistent inflation.
- The Reserve Bank of India’s (RBI) monetary policy, which had maintained the benchmark repo rate at 6.5%, did not provide enough support to the rupee amid global economic pressures
- Global Influences:
- The strength of the US dollar, driven by robust economic data from the US and expectations of further interest rate hikes by the Federal Reserve, exerted downward pressure on the rupee.
- Additionally, geopolitical tensions and fluctuations in global oil prices impacted investor sentiment, leading to increased demand for the US dollar as a safe-haven asset
- Foreign Investment Trends:
- There was a significant outflow of foreign funds from Indian equity markets. Despite Foreign Institutional Investors (FIIs) purchasing Indian equities worth $3.87 billion in July 2024, the outflows in early August suggested a shift in investor confidence
Impact on the Economy
- Inflation and Import Costs:
- The weakening rupee is likely to increase import costs, especially for essential goods like crude oil, thereby exacerbating inflationary pressures in the Indian economy.
- Export Competitiveness:
- While a weaker rupee can make Indian exports more competitive globally, the benefits might be offset by the increased cost of imported raw materials, affecting profit margins for exporters.
- Consumer Prices:
- The depreciation of the rupee can lead to higher prices for imported goods, impacting consumer spending and overall economic growth.
Conclusion
The Indian rupee’s depreciation on August 5 and 6, 2024, highlights the vulnerabilities in the Indian economy amidst global economic dynamics and domestic challenges. Moving forward, the RBI’s policy decisions and global economic trends will play crucial roles in determining the rupee’s trajectory. Investors and policymakers will need to navigate these challenges carefully to stabilize the currency and support economic growth.
