The Indian rupee has been weakening, hitting a low of 85 to the U.S. dollar in December, and nearing 86 before the RBI intervened.
Factors Affecting the Rupee:
Foreign Investment Outflows: Sustained outflows from securities markets after September.
Weak Corporate Performance: Poor results from the July-September quarter.
China's Economic Stimulus: Pushing investors away from emerging markets like India.
Donald Trump's Influence: U.S. dollar strengthened after his election, and his protectionist trade stance worsened the situation.
India's goods trade is struggling with record trade deficits, leading to a higher current account deficit.
Services trade is still in surplus, but the uncertainty around U.S. visa policies (H-1B) is a concern.
Impact of Falling Rupee:
A weaker rupee benefits exporters but increases costs for imports, especially on essentials like oil and edible goods.
Rising import prices could lead to inflation.
Uncertainty in U.S. monetary policy and foreign investment flows add to the instability.
The RBI has been using forex reserves to manage the rupee’s decline, but there's a limit to how much can be done.
The government should clearly state there is no intention to de-dollarize or adopt a BRICS currency.
India's economic issues are also due to weak domestic consumption and low investments, which exacerbate the rupee's weakness.
India's external resilience may be tested in 2025, requiring policymakers to address both domestic and external economic challenges.
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