Can RBI Save the Rupee from Its Decline?

The recent decline of the Indian rupee has become a topic of significant discussion among investors. The rupee’s drop to an all-time low against the US dollar has turned into a serious economic issue, potentially affecting both the country’s economy and the common man’s wallet. The big question now is whether the Reserve Bank of India (RBI) should allow the rupee to fall freely or take necessary steps to stabilise it.

In this article, we will discuss the reasons behind the rupee’s decline, its impacts, and what it means for investors.

What’s Happening?

Recently, the Indian rupee hit a historic low against the US Dollar. On November 14, 2024, during the initial trading session, the rupee dropped to a record low of 84.40. Previously, on November 5, 2024, it had fallen by two paise to 84.13 against the dollar.

Despite disappointing US economic data, which weakened the dollar, it was still unable to stop the fall of the rupee. Several factors are contributing to this, such as the global economic slowdown, rising crude oil prices, ongoing foreign fund outflows, concerns over the current account deficit, and sluggish performance in the domestic stock market, all of which have impacted the Indian rupee.

RBI’s Intervention

The Reserve Bank of India (RBI) actively intervenes to control the value of the rupee and prevent sudden economic fluctuations. At times, RBI buys foreign currencies to ensure adequate funds for imports, which puts pressure on the strength of the rupee.

Conversely, the RBI uses its reserves to stabilise the rupee. However, this action depletes its reserves and can have an impact on the overall economy. For instance, at the start of this year, RBI had reserves of over $600 billion, which have now reduced to $580 billion.

What Does This Mean for Investors?

Reports indicate that a stronger dollar could result in a decrease in capital flows, as investors may turn towards dollar-denominated assets. However, there may also be some positive effects of the rupee’s decline, such as an increase in exports. Due to the rupee’s weakness, sectors like textiles, manufacturing, and agriculture may see a rise in revenue.

What’s Next?

The big question is: should the RBI let the rupee fall? While this may seem easy in theory, in reality, it comes with numerous challenges. For instance, China’s central bank promotes exports by keeping its currency weak. However, in India, rising inflation and increasing food prices complicate this process.

Therefore, if RBI allows the rupee to depreciate, it may not achieve the expected benefits. Due to inflation, exporters might have to spend more on imported raw materials. Studies show that exporters gain only 0.1% to 0.3% from a weaker rupee. This is why the RBI likely understands that prices in the domestic market are already high, and to avoid further fluctuations, it is using its reserves to stabilise the rupee.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

This article is for informational purposes only. This is not investment advice. Disclaimer: Teji Mandi Disclaimer