Rupees depreciation by 14 paise took place on Wednesday, as it fell to a 10-month low against the US dollar. This is in response to dips in Asian currency markets and an abrupt spike in crude oil prices.
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The decline is observed in the Asian currencies after the climb in the yields of the United States treasury bonds. Due to the speculations that the US central bank will maintain the interest rates on a higher trajectory for a longer duration, we can see the increase in the US 10-year yields to 4.26%.
There are many reasons for the rupee to become weak as compared to the US dollar. First of all, previous data can easily show that during the pre-election times, Rupee tends to depreciate as compared to the US dollar. Moreover, the prices of crude oil have increased in the past few weeks, and it has reached almost $90 per barrel.
According to Kedia’s Advisory director, Mr Ajay Kedia, due to dismal risk appetite and rising US bond profits, the US Dollar has increased in value and is putting additional strain on the Rupee.
He also said that the Rupee is still undervalued and in a difficult position despite the conducive domestic financial economic numbers of the Economy. Moreover, as it moves below 83 as against the US Dollar, the RBI can step in to stop further fall.
Thus, main factors like Weak Asian Market actions and inadequate willingness to take risks are leading to the issues with the Rupee depreciation. Also, he sees the Rupee to remain between 83.60 and 83.70 against the US Dollar.
Also, as Russia and Saudi Arabia decided to increase the deadline for their supply reduction by the end of 2023, the prices of oil had fallen from their highest levels since November of last year.
American crude oil at West Texas Intermediate (WTI) futures decreased 0.70% to $86.08 per barrel, while the Brent crude futures dropped 0.74% to $89.37 per barrel.
Moreover, a slump in the national capital markets and the sell-off by the foreign investor groups in India also constrained the rupee against the US dollar.
It is known that a larger FII infusion into India leads to a rise in the value of Rupee vis-a-vis other currencies while the opposite happens in case of the large withdrawal of FIIs. Thus, the FII movement in both the debt and the equity affects the movement of the Rupee.
During the last month, the FII has sold more than Rs 20,600 crore worth of stocks from the Indian stock market. Also, by the 6th of September, they had already sold cash in excess of Rs 4600 crore.
Importing companies and businesses with access often go to their banks to use forward contracts to mitigate their foreign exchange position when the INR gets unstable. Further devaluing the INR when compared to the USD, puts a strain on the appetite for dollars.
Impacts of Depreciation
There are many impacts of rupee depreciation including the increase in the costs of imported goods by the Indian importers. Additionally, it leads to a large inflation in the domestic Indian market.
Thus, the Indian currency is depreciating against the US dollar due to an increase in the yields of the American treasury bonds, and projections of continuously increased rates of interest.
Moreover, the purchasing power of the Rupee is under strain due to factors like the pre-election phase, price hikes for Crude oil, and selling by international investors.
Furthermore, the delay of Russia’s and Saudi Arabia’s oil supply decreases, and FII movements are also leading to the INR worries against the US dollar.