USD-INR forex pair has been in the headlines since the start of the year because of the degrading value of Rupee wrt to US dollars. On 01^st July 2022 rupee closed at 79.063 with day high of 79.48 for 1 US dollar. the Indian Rupee has fallen for 4% in the past 6 months. The rising value of USD against Indian rupee has become a concern for the Indian economy. Rising prices of food and fuels due to the Ukraine-Russia war has been one of the major reasons of depreciation of Rupee. The strength of the US dollar was a result of risk-off sentiment that came partly from concerns over the US Federal Reserve’s capability to check high inflation, which raised the US dollar’s appeal as a safe-haven currency.

How does the Prices fluctuate of USD_INR currency in forex exchange?

The USD-INR forex works on the demand and supply of US currency. Since India has been a net importer and dollar is the currency used in trade, Indians must sell rupees to buy dollars since it is the basic law of economics that demand is directly related to prices the value of Dollar has been increasing ever since then and value of INR has been decreasing.

Some of the Major reasons of Indian Rupee Depreciating against USD

1. Rising prices of Crude oil

More than 80% of Indian crude demand is dependent on import. Crude oil has rates have been rising repeatedly in the past few months due to war tension between Russia and Ukraine which was led to global economic crisis around the globe. Since all the payments of crude oil exports is done in USD, there is more demand of US dollar which means Indian companies must shell out rupees to buy Dollars and make payments of such bills.

2. Withdrawal of money by FIIs from Indian markets

The FIIs have been the Net sellers from the past 6 months and have withdrawn more than Rs2,83,00 crore from the Indian primary markets. Reason behind this selling by FIIs is due to increase in global inflation which has led to increase in interest rate which will lead to increase in US bond yields.

3. Rising dependency of India on Imports

As per the economic data of India, imports have always excided exports which makes India the net importers. Since the base currency for all the trades is US dollars there is more of outflow as compared to inflow of US dollar hurting the foreign reserves of the country. Due to the rising demand of US dollar has become one of the reasons in depreciating of value of Indian rupee.

What will be the consequences of Depreciating value of Rupee against Dollar?

1. Rise in Inflation

Due to continuous depreciation of value of Rupee against US dollar, the direct impact falls on the import bills, which in turn impacts the cost of goods and services for the consumer leading to inflation. As per RBI, inflation rate should be between 2-6% which is suitable for a growing economy. But as per RBI data, inflation in India had rose to 7.79% in April 2022. After measures taken by RBI, the inflation in May 2022 dropped to 7.04% which is still high as per the margins of the RBI.

2. Rise in Interest Rates

Rising Interest rate are indirectly related to depreciating value of Rupee. As due to depreciating value of rupee leads to rise in inflation rate in the country and to control inflation central banks increase repo rates. It is in the hands of RBI to increase or decrease the Interest rates in the country. Due to rising inflation RBI has raised the repo rate by 50BPS to 4.90%. from 4.40% which was second time in 36 days. By increasing the interest rates in the country RBI is planning to cut the buying power of the consumer since increase in interest rates will impact the interest on loans and EMIs to be paid by the consumer. Further if the inflation is still found to be out of the range of RBI, there will be further increase in interest rates.

Road Ahead

Jigar Trivedi of Anand Rathi Shares said the rupee may depreciate towards 80-81 levels by the year-end as twin deficits add to pressure on the emerging market currency.

“The Fed is expected to hike rates by 75 bps in the July meeting, while the RBI meeting is not due until August, which could narrow the yield differentials between India and US, and might further weigh down on rupee,” he noted.

The current inflation rate in USA is 8.6% which is far more than ideal range. As per reports it is said that US feds will further increase soon around 6-7 times this year of which the feds have already revised their interest rates 3 times since March 2022.  The interest rates which will draw the FIIs attention towards the Bonds which will lead to further withdrawing of money from the emerging markets like Indian markets.

Further capital flight will put pressure on the RBI to hike interest rates or lead to rupee depreciation against the dollar, which again would lead to imported inflation for India.