Falling rupee becoming a cause for concern

Satyavan 'Saurabh'
Rupee depreciation means that the rupee has become less valuable against the dollar. The Indian rupee fell to an all-time low of 77.44 against the US dollar. Tighter global monetary policy, strengthening of the US dollar and risk aversion, and higher current account deficit are a cause of concern for the Indian rupee.
Various factors are behind the depreciation of the Indian rupee, a sell-off in global equity markets triggered by an increase in interest rates by the US Federal Reserve (central bank), the war in Europe, and growth concerns due to Covid-19 in China. With the US Federal Reserve raising rates by 50 basis points, global markets were sold off as investors turned to the dollar.
 Dollar outflow is a result of higher crude oil prices and correction in equity markets is also causing adverse dollar inflows.
In India, foreign portfolio investors have pulled out around $5.8 billion since the beginning of this financial year, according to Kotak data, adding to the pressure on the currency.
The steps taken by the RBI to tighten monetary policy to counter rising inflation have also led to depreciation. The growing trade deficit is also under pressure - the deficit widened from $18.7 billion in March to $20 billion in April. In fact, according to analysts, the current account deficit is likely to remain at its highest level since the 2013 crisis.
The Indian rupee on Monday tumbled to a fresh low of 77.43 against the US dollar on a rise in crude oil prices, inflation fears, hike in interest rates and weak domestic equities weighed on investor sentiment. Risk aversion in global markets, the dollar's strength influenced the demand for riskier assets, reducing the local unit.
 The rupee fell 0.7% to 77.43 against the greenback, having touched a previous all-time low of 76.98 in March this year. Analysts said concerns over the continued selling of Indian assets by foreign investors also weighed on the currency.
The outlook on the rupee has deteriorated since Russia invaded Ukraine in February as global crude oil prices rose due to the conflict.
The impact of the rupee depreciation on the Indian economy will be far-reaching; The current account deficit is bound to widen, decrease forex reserves and weaken the rupee. With higher crude oil prices and other significant imports, the economy is heading towards cost inflation.
(To be contd)