Rupee’s Fall Driven by Stronger US Dollar

Source: The post Rupee’s Fall Driven by Stronger US Dollar has been created, based on the article “Why the Rupee’s fall should not be cause for concern” published in “Indian Express” on 23rd December 2024

UPSC Syllabus Topic: GS Paper2- International Relations-Effect of policies and politics of developed and developing countries on India’s interests. And GS paper 3- Economy

Context: The article explains the rupee’s fall past 85 is due to a stronger US dollar, not a weaker rupee. It advises focusing on overall trade competitiveness, inflation control, fiscal discipline, and growth, rather than defending the rupee against the dollar alone.

What is the Current Status of the Rupee Against the Dollar?

1. The rupee has recently fallen to 85.02 against the dollar, marking a significant drop from its previous range of 81-84.
2. This change is attributed to a stronger US dollar rather than a weaker Indian rupee. The dollar index increased from 99.8 to 108.3, influencing the rupee’s value.

How Has the Rupee Performed Against Other Major Currencies?

1. Despite depreciating against the dollar, the rupee has appreciated against the euro, pound, and yen.
2. The exchange rates have moved from 93.49 to 88.17 against the euro, 111.98 to 106.29 against the pound, and 0.58 to 0.54 against the yen.

What caused the US dollar to strengthen?

The dollar strengthened globally due to:

1. US President-elect Donald Trump’s proposed tariffs and immigration policies.
2. Expectations of inflation from tax cuts and spending.
3. This has increase US bond yields, which increased from below 3.8% (September 25) to over 4.5%.

What are the risks of a strong US dollar?

A strong dollar and high US interest rates could:

1. Hurt US exports by making them less competitive.
2. Reduce business investments.
3. Slow the US economy, forcing the Federal Reserve to cut rates.

What Should the Indian Government and RBI Do?

1. The government and RBI should not focus solely on the dollar but consider the rupee’s value against a basket of currencies.
2. They should avoid using interest rates to defend the rupee and instead focus on controlling inflation, managing deficits, and maintaining economic stability to offset potential capital outflows.

For detailed information on India’s stumble on rupee trading holds a lesson on globalization read this article here

Question for practice:

Examine the factors contributing to the strengthening of the US dollar and its impact on the Indian rupee.