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The Fall of the Rupee against the Dollar

Over the last 6 months, the Indian Rupee has depreciated at an alarming rate, breaching the 77, 78 and 79 mark against the US dollar in quick succession. The rupee has depreciated more than 6% since the beginning of the year, nearly 2% of which took place in June, the month that saw India’s currency sink to new lows of 78 and 79 against the US dollar. But why exactly has the Indian currency continued to spiral downwards since the beginning of 2022 ?

A brief History of the Rupee

Firstly, let’s understand the Rupee’s timeline and trajectory over the past few years. The Rupee began the year positively at around 74 against the dollar, recovering still from the March of 2020, when the dollar skyrocketed to 76 and a half rupees per dollar and more recently from India’s second Covid-19 wave where the rupee again depreciated to 74 and a half from 72 against the dollar.

Evidently, a 6% slump from 74.5 to 79 is not the slow, gradual inflation the rupee has typically seen. Numerous intertwined factors have coincided, putting an end to India’s gradual pandemic recovery (in terms of strength of currency) and impelling it into unanticipated depths.

Why ?

The military conflict between Russia and Ukraine has triggered a global geopolitical crisis leading to weakening EM (Emerging Markets) currencies. Additionally, a disrupted supply chain, strong dollar and substantial dollar outflows from India, together are the major factors leading to the rupee’s drastic decline.

Factor 1 : The Russia-Ukraine Conflict

The Russia-Ukraine conflict is at the center of the geographical, political & economic framework of our current world. With numerous sanctions being placed upon Russia, the global supply chain for essential commodities has been severely disrupted. Russia, at the center of the conflict, is the 3rd largest producer of Oil and India, the country in question, is the 3rd largest consumer of oil, 80% of which is imported.

As the military conflict escalated, the fear of sanctions and oil supply uncertainty worldwide led to many nations eithher panic buying, halting imports / exports, or finding alternative sources of oil to meet demand. Due to this frenzy, the epicenter of which is in Europe (Europe heavily relied on Russia for Oil and with European Union sanctions has had to find alternative sources) , oil prices have soared (Prices soared to a peak of $140 per barrel in March) leading to supply chain disruption.

India, despite only importing a minor part of its oil from Russia has had to spend significant sums of money to match the global rise in oil prices amidst the supply chain frenzy. 13% of India’s exports are petroleum products, which have taken a hit with the rising oil prices. Not only does this mean India will be unable to export these products, it also negatively impacts more than 100 countries who import these products to meet local demand. Evidently, this disruption in the supply chain has drastically affected most nations around the world.

India continues to have to increase its expenditure on oil, meaning an increasing trade deficit. This has led to the weakening of the Rupee. The dollar on the other hand, has remained strong and demand for the dollar has drastically increased amidst the increasing oil prices which in turn has further pressurized the Rupee against the dollar. This has also led to inflation within the country as prices of essential goods increase significantly with the increasing cost of raw materials.

Factor 2 : Outflow of Foreign Investments

Foreign Institutional Investors or FIIs have pulled out more than 2.15 Lakh crore rupees worth of shares. But why exactly has this happened ? A combination of rising interest rates around the globe paired with a strong dollar have meant that the FIIs have remained net sellers since late 2021. 'Net sellers' essentially means that more funds are being removed from the Indian stock/bond markets as are being put in. Due to rising interest rates around the world, investors have pulled out of developing countries or Emerging Market economies like India which are risky, volatile and could thus lead to loss. They have instead diverted their funds to the United States where the ever-strong dollar has appreciated to reach new peaks. In this way, they can maximize profits with an appreciating currency and do not have to carry the risk of losing money in markets like India.

In 2022, with the Russia-Ukraine war and the supply chain disruption, investors / FIIs increased selling of their Emerging Market (EM) shares and pulling out funds from stock and bond markets in India in a state of panic amidst the uncertainty. This has led to the Rupee further depreciating as when FIIs pull out significant sums of money in a country, the demand for its currency decreases causing it to depreciate. On the other hand, these sums of money have been put into the dollar causing it to appreciate causing other currencies to in turn depreciate against the dollar.

As the Rupee further goes down, foreign investors will continue to remove funds from the Indian market leading to further devaluation.

India is not the only currency undergoing depreciation against the US Dollar due to the factors listed above. Most EM (Emerging Market) currencies are undergoing similar trends. Infact, India is faring well against its EM counterparts and global currencies against the US dollar.

What steps has India taken to limit inflation ?

The Reserve Bank of India has slowed down the Rupee’s downfall. They initially defended the Rupee at an exchange rate of 77.5 against the dollar and are now slowing the freefall. However they have had to sell more than $40 Billion in foreign exchange reserves from historical forex peaks of $640 Billion. Many economists estimate a further drain of $40-50 billion from forex reserves before the currency reaches stability.

The government, in an effort to reduce the trade deficit (A trade deficit is when the country is importing goods worth more value than they are exporting ) and thus limit inflation has hiked Gold import tax to 12.5% from 7.5%. India’s trade deficit in May rose to more than $24 Billion from $6.53 billion and Gold imports alone rose to $6 billion from $678 million. An increased import tax on Gold will allow the trade deficit to reduce.

Aside from the Gold Tax, the government also announced a series of measures to reverse the pullout of FIIs, a major factor in the weakening of the Indian Rupee. Firstly, it liberalised forex flows, making it easier and consequently more attractive for investors to once again put their money into Indian markets. Additionally, the government doubled the limit for borrowers, making India a popular option to raise capital.


Despite aggressive RBI intervention, the Rupee continues in its downfall. Analysts expect the Rupee to further deflate till 82 in Q3 before recovering to some form of stability by the end of the year at 81. The RBI recently announced a new series of measures like doubling the borrowing limit, no interest rate ceiling and liberalizing rules for foreign traders to invest into Indian bonds. However, as India’s trade deficit (>25 Billion in June) continues to increase due to rising prices around the world, many analysts say there is no respite soon.

~ Nehal Singhal


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