Why Indian rupee is depreciating very fast against USD?

The US dollar is rising again against the Indian rupee due to a combination of global economic dynamics, monetary policies, and market sentiment. It has breached 89 rupees for the first time ever.. (1USD=89 Rs). Several factors are driving the dollar’s strength while applying downward pressure on the rupee value

Federal Reserve’s Interest Rate Stance

The US Federal Reserve's persistent stance on maintaining relatively higher interest rates compared to the Reserve Bank of India attracts more investment flows into dollar-denominated assets. Higher yields in the US bond market make it more appealing for foreign and domestic investors to park capital in dollars, boosting demand and causing the dollar to appreciate against the rupee.

Global Economic Uncertainties

Heightened geopolitical tensions and global economic uncertainties tend to increase risk aversion among investors. In such conditions, the US dollar acts as a safe-haven currency. Investors move funds from emerging markets, including India, to the US dollar, increasing demand for dollars and contributing to the rupee’s depreciation.

Trade Deficit and Import Pressures in India

India’s trade deficit, driven by high imports such as crude oil and gold, increases demand for foreign currency to pay for these goods. When import payments rise, the supply of rupees increases in the foreign exchange market to buy dollars, pushing the rupee down.

Capital Outflows and FII Movements

Foreign Institutional Investors (FIIs) may reduce equity and debt investments in Indian markets in response to global events or better returns elsewhere. These outflows require converting rupees back into dollars, again adding pressure to the rupee. Volatile capital flows linked to monetary tightening abroad amplify this effect.

Inflation Differentials

India’s relatively higher inflation rate erodes the purchasing power of the rupee faster than the dollar. Persistently high inflation prompts market participants to anticipate rupee depreciation versus the dollar, influencing their forex trades and exchange rate expectations.

Conclusion

In summary, the rise of the US dollar against the Indian rupee is driven by higher US interest rates, global economic risk aversion, India’s trade deficit, capital outflows, and inflation differentials. The interplay of these factors ensures foreign capital favors the dollar, creating ongoing pressure on the rupee’s exchange value. Investors and businesses sensitive to currency movements should closely monitor these evolving macroeconomic indicators to manage currency risk effectively.

This topic is highly relevant for anyone involved in investing, international trade, or planning financial decisions impacted by forex volatility. Understanding why the dollar rises against the rupee helps in strategizing currency exposure and long-term financial planning.