Indian Rupee Hits All-Time Low
Posted On Saturday 18th January 2025
The Indian rupee has hit an all-time low recently against the dollar. It currently is below 84.50. In November, it has fallen the most in a one-month timeframe.
Why is the Indian Rupee Falling?
Here are the top three reasons for the falling rupee:
Reason 1: Continuous Outflow of Foreign Funds
In the last two months, we have seen FIIs pulling out of the Indian market. In October, the net outflow was Rs 1.14 lakh crore, while in November, the net outflow was Rs 45,974 crore. It is one of the main reasons for the falling rupee.
Reason 2: US Election Result
Trump recently won the US presidential election. The win is likely to lead to higher US Treasury yields and a stronger dollar due to market expectations of fiscal expansion, rising interest rates, and increased safe-haven demand. These factors would pressure Asian currencies, including the Indian rupee, by triggering capital outflows (reason 1), increasing import costs, and widening trade deficits.
Reason 3: Ongoing Geopolitical Tension
Ongoing geopolitical tensions, particularly the Russia-Ukraine conflict and increasing US-China rivalry, have created a volatile global economic environment. This uncertainty has led to a risk-off sentiment among international investors, prompting them to seek safety in US dollar-denominated assets.
Impact of a Falling Rupee on India
A falling rupee can have positive and negative impacts on the Indian economy. Let us look at the details:
Positive Impacts
- Export Boost: A weaker rupee can make Indian exports more competitive in the global market. This can lead to increased demand for Indian goods and services, boosting export earnings. The Indian IT industry is one of the biggest beneficiaries of the falling rupee.
- Remittance Benefits: For Indians living abroad, a weaker rupee means that their remittances can go further in India. It can benefit the economy, especially in regions heavily reliant on remittances.
Negative Impacts
- Inflationary Pressure: A falling rupee can lead to higher import costs, particularly for essential commodities like crude oil. This can fuel inflation, eroding purchasing power and affecting consumer sentiment.
- Increased Debt Burden: Indian companies with foreign debt will face higher costs to service their loans as the rupee depreciates. This can strain corporate balance sheets and hinder investment.
- Foreign Investor Sentiment: A weakening rupee can erode investor confidence, leading to capital flight and a decline in foreign direct investment (FDI) inflows.
- Economic Growth: A combination of higher inflation and reduced investment can slow down economic growth.