The Indian rupee has encountered a severe decline, marking its worst single-day drop in nearly two months, with the value of $1 approaching ₹84. This development is part of a broader struggle for the rupee, which has faced a tough August, breaking past the ₹84 mark earlier this month—a historic low for the currency.
The reasons behind this recent slump are multifaceted, with the primary trigger being a substantial sell-off in Indian markets. Foreign investors have pulled out approximately $1.2 billion from Indian markets, driven by panic in global markets. Concerns over a potential recession, sparked by weak job data from the U.S., and rising geopolitical tensions in West Asia, have led investors to shift their funds from risky assets to safer investments. This global sell-off has put immense pressure on the Indian rupee.
While there was some recovery in the rupee over the past few weeks, today’s significant drop has reversed most of those gains. The outlook remains uncertain, as foreign investor sell-offs continue. So far, more than $2.5 billion has been withdrawn from Indian markets in August alone, further weakening the rupee and strengthening the U.S. dollar.
The growing demand for the dollar is not limited to India; it has also appreciated against other major currencies like the yen, euro, and yuan. Indian importers are contributing to this increased demand as they buy dollars aggressively to hedge against further depreciation of the rupee. Hedging is a strategy where businesses purchase extra dollars now to safeguard against potential future losses from currency fluctuations, especially when paying for imports.
The Reserve Bank of India (RBI) has taken steps to stabilize the currency. It has been offloading dollars from its reserves to buy Indian rupees, attempting to defend the currency from further devaluation. Additionally, the RBI has reportedly urged major Indian banks not to bet against the rupee in the markets.
The fate of the rupee in the coming months will have broader implications, particularly in the fight against inflation. The RBI has already warned of a potential rise in inflation starting in September, driven by higher food prices. While overall inflation in India has hovered around the RBI’s target of 4%, food inflation has been notably higher, surpassing 5% in July. A weaker rupee could exacerbate this issue by making key imports, such as crude oil, more expensive, which in turn raises the cost of goods and services across the economy.
As India’s central bank braces for a prolonged battle to defend the rupee and manage inflation, many experts are watching closely. The outcome of this struggle will not only shape the future of the Indian economy but also impact everyday lives, particularly as the cost of living continues to rise.
