Rupee Hits Record Low of 84 Against USD: Factors Leading to the Fall and the Outlook

Rupee Hits Record Low of 84 Against USD: Factors Leading to the Fall and the Outlook

Sub :Eco

Sec: External sector

• Rupee’s Record Low:
  • The Indian Rupee ended above 84 per US dollar for the first time on Friday, closing at ₹84.07.
• Factors Triggering the Slide:
  • Outflows from Foreign Institutional Investors (FIIs):
    • Significant foreign fund outflows have exerted downward pressure on the Rupee.
  • Surge in Crude Oil Prices:
    • Rising crude oil prices have increased import bills, weakening the Rupee.
• Higher Demand for the US Dollar:
  • Increased demand for the US dollar from foreign banks has contributed to the Rupee’s decline.
• Weak Domestic Markets:
  • Weakness in domestic equity markets has further weighed on the Rupee.
• FII Strategy Shift:
  • Foreign Portfolio Investors (FPIs) are adopting a ‘Sell India, Buy China’ strategy, moving investments to Chinese stocks.
• RBI’s Intervention:
  • The Reserve Bank of India (RBI) has been actively protecting the Rupee level for the past two months.
  • Despite RBI’s efforts, the Rupee has not fallen below ₹84.
  • Softening of the US Dollar Index helped prevent a sharper decline in the Rupee.
• US Economic Indicators:
  • Higher than Expected Unemployment Claims:
    • US unemployment claims exceeded expectations, signaling potential economic slowdown.
• Rising US Inflation:
  • US inflation rose by 0.2% month-on-month versus a forecasted 0.1%.
  • Core CPI increased by 0.3% against a forecast of 0.2%.
  • Annual inflation also rose more than forecasted.
• Impact of Domestic Equity Markets:
  • Recovery in Domestic Equity Markets:
    • A recovery in domestic equity markets has provided some support to the Rupee.
  • Aggressive Selling by Foreign Investors:
    • Foreign investors’ aggressive selling in domestic markets has restricted the Rupee’s gains.
  • Foreign Investors Selling Pressure:
  • Strategy Shift to China:
  • FPIs are moving investments to Chinese stocks, perceiving them as cheap.
• Outlook on the Rupee:
  • Volatility Expected:
  • The Rupee is expected to remain volatile due to:
    • Uncertainty over crude oil prices.
    • Fluctuations in the US dollar index.
    • Geopolitical tensions, especially in the Middle East.
  • Potential Further Pressure:
  • Overall strength of the US Dollar may further pressure the Rupee.
• Support from Declining Oil Prices:
  • A decline in crude oil prices could support the Rupee at lower levels.
• Analyst Insights:
• Experts stated that the Rupee’s fall is due to FII outflows, elevated crude oil prices, and weak domestic markets. The US Dollar Index’s overnight softening prevented a sharper decline and FPIs are moving money to Chinese stocks, leading to increased selling pressure on the Rupee.

US Dollar Index (DXY)

• Definition:
  • The US Dollar Index (DXY) is a measure of the value of the US dollar relative to a basket of six major world currencies.
  • It provides an overall indication of the strength or weakness of the US dollar in the global market.
• Composition of the Index:
  • The index is a weighted average of the US dollar’s exchange rates against six major currencies:
• Euro (EUR) – approximately 57.6% (largest component)
• Japanese Yen (JPY) – around 13.6%
• British Pound (GBP) – about 11.9%
• Canadian Dollar (CAD) – approximately 9.1%
• Swedish Krona (SEK) – about 4.2%
• Swiss Franc (CHF) – around 3.6%
• Important: The Euro has the largest weight, making movements in EUR/USD the most influential in the index.
• Historical Background:
  • The US Dollar Index was introduced in 1973 by the Intercontinental Exchange (ICE).
  • It was initially set to a base value of 100, reflecting the value of the dollar after the Bretton Woods Agreement was terminated, and currencies began to float freely against each other.
• Purpose and Use:
  • The DXY serves as a benchmark for the performance of the US dollar globally.
  • It is used by traders, investors, and economists to gauge the relative strength of the dollar, assisting in decisions related to foreign exchange (Forex) trading, commodity pricing, and investment strategies.
• Example: If the DXY rises, it indicates the US dollar has appreciated against the basket of currencies, while a decline suggests a depreciation.
• Implications:
  • A strong DXY generally indicates a robust US dollar, which can lead to:
    • Higher import purchasing power for US consumers.
    • Potentially lower commodity prices (since commodities are often priced in USD).
    • Challenges for US exporters, as a stronger dollar makes US goods more expensive in foreign markets.
    • Conversely, a weaker DXY may boost US exports but increase import costs, leading to inflationary pressures.