On June 20, 2024, the Indian rupee fell to a record low of 83.6650 against the US dollar, driven by multiple economic factors. This decline reflects broader trends affecting emerging Asian currencies and highlights the interplay between local and global economic forces.
REASONS FOR THE RECORD LOW
Anticipated Outflows and Importer Demand
• Anticipated Outflows: Market expectations of capital outflows from India have put pressure on the rupee. Investors often move their capital to more stable currencies, such as the US dollar, during times of uncertainty. • Local Importer Demand: Strong demand for the US dollar from local importers, who need dollars to pay for imports, has further driven the rupee’s depreciation.
Broader Economic Trends
• Stronger US Dollar: The US dollar has strengthened due to global economic conditions, including the Swiss National Bank’s interest rate cut, which contrasts with US monetary policy. This divergence makes the dollar more attractive to investors. • Weaker Chinese Yuan: The Chinese yuan’s weakness has added pressure on other Asian currencies, including the rupee. On the same day, the offshore yuan dropped to its weakest level since November 2023.
Equity Outflows
• Foreign Equity Sales: Foreign investors have sold a net of $2.6 billion of local equities in 2024. This capital flight has exerted additional downward pressure on the rupee. • Debt Market Inflows: Despite equity outflows, there have been significant dollar inflows into India’s debt markets, totaling $7.5 billion, as the country prepares for inclusion in the JPMorgan Emerging Market bond index.
IMPACT ON THE INDIAN ECONOMY
Central Bank Interventions
• RBI’s Role: The Reserve Bank of India (RBI) typically intervenes to keep the rupee within a tight band, preventing sharp appreciation or depreciation. However, the absence of such support on June 20 allowed the rupee to fall significantly. • Market Expectations: Forex experts, like Sajal Gupta from Nuvama Institutional, suggest that the record low is not a major concern unless the rupee breaches 83.80. Any further depreciation is expected to be gradual.
Comparative Performance
• Asian Currency Trends: The rupee’s decline is consistent with trends in other Asian currencies. For example, the offshore Chinese yuan also weakened, reflecting the broader strength of the US dollar. • Relative Resilience: Despite hitting a record low, the rupee remains one of the best performing currencies in Asia this year, second only to the Hong Kong dollar. This indicates its relative resilience amidst regional currency fluctuations.
CONCLUSION
The Indian rupee’s fall to a record low against the US dollar on June 20, 2024, is the result of a combination of anticipated outflows, strong local importer demand, a robust US dollar, and broader regional currency trends. While this decline poses challenges, the rupee’s relative performance within Asia suggests a degree of underlying strength. Continued monitoring and strategic interventions by the RBI will be crucial in managing the rupee’s value and ensuring economic stability.
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