Rupee Breached 78-mark To Hit Record Low: Reasons and Impact

Rupee Low

The Indian rupee hit an all-time low of 78.14 on Monday morning. On Friday, the Rupee closed 77.84 against the Dollar, and today it traded 30 paise lower. What are the reasons for the continuous fall, and how will it impact you? Let us look at answers to this question.

Why is the rupee falling?

The rupee is falling for many reasons, and most of them are interlinked. Below are some reasons:

Inflation worries: US consumer price index jumped 8.6% for the month of May. Since December 1981, it is the biggest surge in US inflation. It pushed the US 10-year yield. On Monday morning, the US 10-year yield touched 3.2% after US inflation beat expectation. 

FII Selling: One of the reasons FIIs are selling from the Indian equity market is because of the rising bond yield in the US market. With the selling, the Indian rupee is becoming weaker. Since Oct 2021, they have sold Rs 3.45 lakh crore worth of equity.

Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies. It continues to surge because of US 10-year yield and inflation data. The dollar index crossed the 104-mark, and it dragged the local currency on Monday morning.

Fed taking aggressive stance: The experts believe that the US Federal Reserve may take a more aggressive method to bring inflation down. In the coming months, the central bank may go for a sharper rate hike, and it is impacting the Indian rupee.

Crude Oil Price: Most of the crude oil that India buys hit a decade high of $121 barrel last week, and it does not look like the prices will come down. The rising global crude oil prices are another reason for the falling rupee.

Low forex reserves: The Indian forex reserves touched $600 billion for the first time in almost a year recently. Last year, in July, the forex reserves were over $640 billion, and it has been coming down since then.

Impact of falling rupee

On the companies and economy: For the items that are imported, including oil, the payment is done in dollars. Companies importing items need to buy Dollars to pay for imported items. With the fall in the rupee, imported items will get more expensive for companies doing the import. Also, for the government, oil bills are increasing with the fall in the rupee and rising crude oil.

Car and other items: Other imported items like luxury cars, mobile phones, appliances, and other imported products will become expensive. 

Loans: With the rupee falling, the inflation will go up higher further (indirectly). To bring down the inflation, the RBI will have to increase the repo rate like it did last week. It will translate to banks increasing lending rates that will eventually increase consumers' existing and new EMIs.

Stock price: As the rupee falls, foreign investors will continue to pull money from the Indian market (they get the benefit of conversion). It may lead to a sharp fall in the equity market.

US travel and education: If you plan to go on a holiday to the US or plan your child's education there, now you will have to spend more rupees for the same dollar amount due to its depreciation.

Investors should continue to monitor the above factors and make their investment decisions wisely.