Rupee sinks to new low on strong $, weak yuan

Rupee sinks to new low on strong $, weak yuan

Subject: Economy

Section: External Sector

In News: The rupee sank to an all-time closing low owing to a strong dollar

Key Points:

• The rupee sank to an all-time closing low on Thursday, weighed down by a strong dollar index and a weakening Chinese currency even as RBI sold dollars to arrest the fall.
• The rupee closed at 83.1475 per dollar, down about 20 paise against the previous close of 82.95.
• The triggering factors were the emerging real estate crises in China, the People’s Central Bank of China (PBOC)’s rate cut, and the strong sell-off in China’s equity market.
• That coupled with rising dollar post higher than expected US inflation data reignited speculation of a hawkish Fed and added pressure to the rupee. With the likelihood of US yields to remain high emerging markets see weaker interest.
• Weakening of yuan is associated with weakening Rupee, because there is an expectation that due to trade reasons India cannot allow Rupee to appreciate much against Yuan. These expectations add downward pressure on Rupee.

Concept

Increase in supply of rupee relative to foreign currency, say US$.

• Balance of payment deficit
  • Decrease in net export i.e. Export-Import.
  • Net capital outflow i.e. capital outflow- capital inflow.
• Fall in relative rate of interest in India (comparatively higher rate of interest in foreign capital market lead to capital outflow)
• Higher crude oil prices/ higher global price of any imported goods that would  increase import bill.
• Wars/Pandemic leading to global supply chain disruption and uncertainty in consumer-investment expectation. For example-recent Ukraine War.
• Fall in the currencies of emerging market peers.
• Higher foreign denominated external debts- it will increase demand of foreign currency relative to domestic currency.

Impact-

Depreciation in rupee is a double-edged sword for the economy.

Positive: While a weaker currency may support exports as export becomes cheaper for foreign countries against which currency has been depreciated.

Negative: 

• It poses risk of imported inflation, and may make it difficult for the central bank to maintain interest rates at a record low for longer.
• The currency’s weakness makes imports costlier.
• It will be costlier for students studying in overseas universities as this is the time when they purchase dollars towards fees.
• A falling rupee can be a worry for those planning a holiday abroad.
• Importers of capital goods will see shrinkage in margins.
• Repayment of external debt becomes costly.

Losers:

• People Importing from outside.
• People seeking foreign education.
• People traveling abroad.
• People investing abroad.
• People seeking medical treatment abroad etc.

Gainers:

• Exporters of India.
• People receiving remittances from Non Resident Indians (NRI).
• Foreign tourists as travel to India gets cheaper.
• NGOs receiving foreign donations.
• Foreigners investing in India.
• Foreign students studying in India.