Analysts attribute the weakness in the rupee and domestic equities to persistent foreign investment outflows from equity markets, a widening current account deficit, and limited RBI intervention

DC Edit | Rupee Plunge Offers Reality Check, Stresses Self-reliance

Indian Rupee Hits Historic Low, Causing Economic Concerns

The Indian rupee has plummeted to an all-time low of Rs 90.28 per dollar, marking a 5.3 per cent year-to-date drop and the sharpest annual decline since 2022. This significant drop has left policymakers scrambling to address the issue.

Causes of the Rupee's Decline

Foreign Investment Outflows: Analysts attribute the weakness in the rupee and domestic equities to persistent foreign investment outflows from equity markets.
Widening Current Account Deficit: The current account deficit is another factor contributing to the rupee's decline.
Limited RBI Intervention: The Reserve Bank of India (RBI) has taken a conscious decision to stop defending the rupee at a particular exchange rate.
Global Economic Uncertainty: Big investors have been reallocating their portfolios, offloading investments in developing economies and parking their money in global leaders.

Impact of the Rupee's Decline

The rupee's depreciation will make imported goods, foreign education, and foreign travel costlier, but it will also make Indian exports more attractive in the global market. A weaker rupee will partially offset the impact of US tariffs on Indian goods, and a revival in export-focused industries will help India generate more jobs for its growing young population.

Long-Term Benefits

While the price rise in imported goods could be a concern, it may also nudge policymakers to promote domestic production, which will benefit the economy in the long run. Additionally, a weaker rupee could accelerate the electrification of India's transport system to reduce dependence on imported fossil fuels.

Way Forward

If global uncertainty eases and India seals trade deals with the US and other countries, Indian exporters, backed by a cheaper rupee, will be in a much better position to reap the benefits. Policymakers must address the issue by increasing self-reliance in several import-dependent sectors and accelerating the electrification of India's transport system.