The constant thought that is percolating the minds of all investors and financial experts is what will happen if the rupee pegs at INR 70 against the US dollar in the near future! Since Feb, 2017, the rupee tanked for the first time to below the 67 level in the second week of May, 2018. Certain surveys and polls carried out in February, 2018, indicated that the rupee may continue depreciating against the US dollar to the 70 mark and beyond by the end of 2018. Some of the financial companies and institutions, including the Bank of America, Deutsche Bank, IFA Global, DBS Bank, Edelweiss Financial Services, and Yes Bank, were among those who forecast that the Indian currency will most likely hit the level of 70 and/or depreciate more.
Of around 20 market participants in the polls, only 3 had predicted that the Indian rupee may rise up and become stringer against the US dollar from the February 2017 mark of 67.32 INR to the US dollar.
What are the reasons for the fall of the INR against the US dollar?
One of the main reasons for the depreciation of the Indian rupee is the rise in prices of crude oil across the global markets. There are growing fears that the US will re-impose its economic sanctions on Iran. This worried the traders, thereby causing US oil price to increase to more than $70 per barrel. This was first time since Nov 2017, that US oil hit the $70 a barrel mark. Almost 80 percent of all the oil consumed by India is imported and this puts increased pressure on the INR.
Another reason for the fall in the India rupee is the strengthening of the US dollar. The US dollar remained close to its peak value of 2018 in the second week of May as the perception and view of a strong US economy did not waver despite the release of poor US wages and jobs data. It may be noted that as the US economy grows stronger, it tends to pull back the investments from different emerging markets across the globe.
A falling rupee: Why is it bad?
Imports become more expensive when the Indian rupee weakens against the US dollar. It is not possible for India to reduce certain kinds of imports, like oil, and this can have a negative impact on the current account deficit of the country. This begins a vicious cycle, where a weak Indian rupee causes oil to be more expensive as oil is the main import of the country.
Increased cost of oil leads to increase in costs of transportation, which subsequently increases the costs of groceries and vegetables. A depreciated rupee also increases the costs of education as well as makes vacations in foreign lands much dearer. Different kinds of good which have varied imported parts, like smartphones, computers, cars, etc., also become costlier. All trade and industries based on imports end up losing money.
A falling rupee: Why is it good?
A weaker rupee against the US dollar is beneficial for export companies as they will receive more money for the goods that they export. All the industries based on exports tend to gain when the Indian rupee depreciates. For instance, pharmaceutical and IT (information technology) companies get a large chunk of their revenues from other nations and hence will gain more from a weak rupee.
Certain economic analysts have stated that the value of the Indian rupee as 64 to the US dollar in the past had damaged the export industry as it was not justified according to the “real” rates of exchange. Experts are of the opinion that the current level of the rupee against the US dollar has brought about some stability and that the current level of 66-67 rupees to the US dollar will be maintained for several more months to come.