Why has India’s INR currency been weakening against the USD — Analysis
Drastic weakening of the INR against USD
Today, I am looking at the possible reasons why the Indian currency; INR has weakened against the dollar.
Let’s check the charts USD/INR chart …
January of this year, 1$ was equal to 73Rs after which INR’s value has been depreciating against the dollar continuously. July news was flashing that INR’s value fell to 80 to 1 dollar, which is a negative milestone, as Rupee was further weakening to Dollar.
Now, INR’s value has stopped further depreciation and INR’s value did minutely appreciate to 78.6 INR per dollar and now is 79.5 INR for 1 dollar.
Brief Summary commentary of factors that led to INR’s price falling against dollar
Accounting for INR’s accelerated depreciation to a dollar since February. The period corresponds to the major global event of the Russia- Ukraine war.
Post this we know that the US Fed increased interest rates, as a consequence of which it was expected that currencies of emerging or underdeveloped countries weaken to the dollar.
A major factor that contributed to INR’s weakening against the dollar was the rising cost of crude oil prices.
Rise of Crude oil prices
Since December of last year crude oil prices have been rising with crude oil prices in Dec 2, 2021 being 65$ per barrel which peaked to 130$ this March 2022. Now crude oil prices have cooled down to 88$. However, since India imports most of its crude oil supply, this had an effect on INR value against US dollars.
Crude Oil prices kept rising with businesses beginning to function after its drastic price fall during Covid lockdown period. Post that, crude oil prices rose due to issues with Russia with its war on Ukraine, as this caused hostilities with other World countries that imposed sanctions on Russia, which did have an impact on crude oil prices with crude oil global supply affected.
India relied on imported Crude oil supplies, which affected its Current Account, leaving a Current account trade deficit.
High demand for dollars by Indian importers, buyers and investors leading to appreciation of dollar
More import spending of USD than USD export earnings led to Current Account deficit for India
Current Account Deficit comes in when a country’s imports are more than its exports. This means since imports were more, foreign currency reserves of US dollars were spent more than what’s earned.
When imports happen, entities and individuals importing or buying goods and services from overseas will need to buy dollars to pay sellers and they do this by selling INR currency for dollars.
However, when Indian entities and individuals export or sell their goods and services overseas , the overseas buyer parties sell dollars to buy INR to pay their sellers.
So, this demand and supply of USD and INR in international trade determines the price of the currencies. So, with India having conducted more imports than exports, more INR was sold for Dollar, and with more demand for dollars, the price of USD strengthened against INR.
India has a current account deficit of 13400 $ million according to data from Trading Economics which is 1.7% of its GDP.
India’s negative Balance of Trade confirming more foreign exchange expenditure than earnings
As India’s foreign trade transactions comprised more of imports than exports with other Global countries, its Balance of Payments is in the negative being -30 Billion $. All this consequently had INR value depreciate and fall against USD.
US Fed’s interest rate hikes led to USD appreciating against INR
As the US FED commenced its monetary tightening measures that took off USD liquidity from the economy, Foreign Institutional Investors pulled out their investments out of Indian stock markets, taking their money from Indian stocks which they ended up putting into USD bonds and treasuries.
During uncertain times, its characteristic behavior of people to protect their wealth by storing their wealth investing in safe haven assets and USD being a World Reserve currency is considered a safe haven asset, and Indian investors may have converted their INR to Dollars to hedge against INR currency depreciation.
These are some factors that I understand have led to depreciation or weakening of INR against the US dollars.
For INR to become a stronger currency, India should earn surplus export earnings through international trade
Few months ago, there was worry about the rising cost of crude oil prices as it was depleting USD foreign reserves of India. Now combine this with the Trade Account Deficit and negative Balance of Payment situation of India, there was cause for worry that all this will negatively impact the value of INR, weakening it.
Fortunately, India maintains enough foreign currency reserves so it’s unlikely that INR would devalue to such an extent as it’s done for Sri Lanka, however, India has to take care that it earns surplus foreign exchange reserves through exports, as that would make INR a stronger global currency.
A strong INR, reflects well on the global performance of the Indian economy where because of good exports, INR‘s value appreciates or increases due to more demand for the fiat currency. This will enrich India’s treasury with more surplus foreign exchange reserves as well which is always good to maintain since USD is the World Reserve currency and the strongest and most powerful global fiat currency in the World.
India misses out on the opportunity to earn from exports of Web3 products and services
Here I end my article, but I can’t resist mentioning that India misses a chance to earn more through its exports of Web3 services as the Indian Government is harsh and intolerant about cryptos.
So, there being a negative environment for crypto based companies, with harsh legislation involving high taxation and other restrictive measures, Blockchain and Web3 companies will not establish in India, and will flock to other crypto friendly countries.
So, India is not going to be leading in exports of Web3 services to enrich its economy, strengthen its INR currency etc. This is a shame because India has the world’s largest number of employable youth who can be trained and employed in jobs catering to the Web3 industry but India is throwing away its demographic dividend very sadly. Shrugs…
Thank you for reading!!
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