Rupee’s Record Low vs Dollar: Understanding the Dynamics of Currency Fluctuations

If you follow the macro news, you may have encountered one constant update—the Indian Rupee’s value against the US Dollar. Now, you may be wondering why this is relevant to you, someone who does not exchange Rupees for Dollars in daily life., Well, the value of the Rupee is more significant than you think.

In December, the Rupee depreciated to over 85 against 1 US Dollar, a historic first. But wait, why are we saying “depreciated” when the Rupee’s numerical value has increased to a record high? 

Here’s where it gets interesting: When the Rupee’s number goes up against the US Dollar, you need more Indian currency to buy one Dollar. Thus, when we say the Rupee has hit an all-time low, we’re referring to its value relative to the Dollar, not the number itself.

Think of it this way: You planned to buy mangoes. If you got one mango for ₹70 last week and now need ₹80 for the same mango, you’re spending more. The mango (Dollar) is the same, but your Rupee buys less of it, so its value has fallen—even though the number went up. 

Let’s take it up a notch now.

Currency Appreciation and Depreciation: Explained

First, the value of a currency increases or decreases due to a combination of supply, demand, global dynamics, and market-driven factors. When demand for the currency increases, its value rises, and vice versa. Let’s understand this better.

Currency Appreciation

Currency appreciation occurs when the value of one currency increases compared to another. In simple terms, this means you can buy more of another currency with the same amount as your local currency.

Impact: 

• Cheaper Imports: Reduces the cost of imported goods, easing inflation.

• Export Challenges: Indian products become pricier for global buyers, potentially reducing demand.

Currency Depreciation

Currency depreciation is the opposite. It happens when the value of one currency decreases compared to another. This means you’ll need more of your local currency to buy the same amount of another currency.

Impact: 

• Higher Import Costs: Essential imports like crude oil and electronics become more expensive, increasing inflation.

• Export Boost: Indian goods become cheaper internationally, benefiting exporters.

Let’s put this into perspective now.

Rupee at All-time Low

Last week, the Indian Rupee hit an all-time low of 85.06 against the US Dollar after the US Federal Reserve cut key interest rates by 25 basis points to a range of between 4.25% and 4.50%, and signalled a hawkish turn in the future outlook on policy rates. (One basis point (BPS) equals 1/100th of 1% or 0.01%). 

This move by the Fed, aimed at stimulating economic growth in the US, sent ripples through global financial markets. When the Fed lowers interest rates, borrowing in Dollars becomes more attractive, increasing demand for the currency. 

For India, this surge in demand for the Dollar has put downward pressure on the Rupee, resulting in a capital outflow. Additionally, the country’s persistent trade deficit, which rose to a record high of $37.8 billion in November, and reliance on crude oil imports exacerbate the Rupee’s vulnerability.

Furthermore, expectations about incoming US President Donald Trump’s policies have also strengthened the Dollar.

Rupee vs Dollar: The Trend

Throughout 2024, the Indian Rupee has shown a complex mix of vulnerability and strength against the US Dollar. While external pressures have tested its stability, the Rupee has stood better than many other emerging market currencies. But, the cause of concern may be the pace of its decline.

Source: Data collated by Trading View.
Note: The information provided is for educational purposes only. Please check market movement in real time for further clarity.

The table shows that the Indian Rupee has been falling against the Dollar since the beginning of 2024. This year, its average value has been about 83, with the lowest mark at 82.69. The decline has amplified import costs and fuelled inflationary pressures despite recent signs of cooling consumer prices in November.

This brings us to another important point: inflation. Macroeconomic indicators like inflation and GDP growth also play a crucial role in determining the value of the Rupee versus the Dollar. Let’s discuss this at length.

Rupee & Inflation: What’s the Connection?

The weakening Rupee has raised concerns about its broader implications for the economy. At the same time, India’s inflation cooled to 5.48% in November 2024, a noticeable drop from October’s 6.21%. While these two metrics may seem unrelated at first glance, they are well connected. How? A depreciating rupee directly influences inflation, particularly in an import-heavy economy like India. Here’s more: 

Higher Import Costs:

A weaker Rupee increases the cost of importing goods and services priced in Dollars. This is especially significant for essential machinery, electronics imports, and more. Higher import costs often lead to a rise in overall consumer prices. This increases the prices of the goods in the market, and you end up paying more.

Fuel Prices as a Key Driver:

Crude oil is India’s most significant import, and its cost is denominated in Dollars. A depreciating rupee makes oil more expensive, cascading into higher fuel and transportation costs driving up prices across various sectors.

Imported Inflation:

A weaker Rupee contributes to imported inflation, which raises the cost of goods and raw materials imported from abroad. This means your purchasing power to buy goods reduces.

The Balancing Act:

The RBI may increase interest rates to control inflation, but this can inadvertently hinder economic growth by making borrowing more expensive for businesses and individuals. Thus, it’s a vicious cycle of sorts.

How is RBI tackling this?

The Reserve Bank of India has been actively intervening in forex markets to check the Rupee’s depreciation. This is why India’s forex reserves are declining and are not at a six-month low at the beginning of December.

By utilising its foreign exchange reserves, which stood at approximately $652.87 billion as of December 13, the RBI has managed to stabilise the Rupee and reduce volatilities.

Additionally, prudent monetary policy decisions ensured that inflation remained within manageable levels, further supporting the currency.

Are there Upsides to a Weak Rupee?

While a depreciating Rupee brings challenges, it’s not all bad news. There are potential benefits:

Export Growth: Sectors like IT, pharmaceuticals, and textiles benefit as Indian goods and services become more competitive globally.

Boost to Tourism: A weaker Rupee attracts foreign tourists, as their currencies have greater purchasing power in India.

To Wrap it Up

The recent depreciation of the Indian Rupee underscores how global monetary policies, like the Fed’s rate cuts, can profoundly impact emerging markets. While a weaker Rupee presents certain advantages, such as boosting exports, its broader implications—higher inflation and increased import costs—pose significant challenges.