Should We Really Worry About The Falling Rupee? Pros And Cons Of Rupee Depreciation

Donald Trump's victory has pushed the Indian rupee to another historic low and currency strategists say that it may fall further as the US dollar gains popularity following the election and remains a safe bet for investors around the globe. Outflows from the Indian stock market is another reason for a weakening rupee.

The Indian currency has depreciated nearly 1.4 percent this year so far and touched another record low of 84.40 against the greenback on Monday, according to Bloomberg data. The Reserve Bank of India (RBI) will more likely intervene to give the rupee some support, according to traders.

Interestingly, rupee is not the only emerging market currency that has depreciated in the past few months. Almost all emerging market currencies fell once Trump neared victory in the US election.

Mexican Peso dropped over 3 percent, Chinese Yuan and Thai Baht fell more than 1 percent, Malaysian ringgit and South African rand also took the heat of a stronger dollar right after the election.

"Trump's win has turned up the pressure on the rupee, hinting at potential further depreciation as US policies continue to bolster the dollar. Despite this immediate impact, a longer-term view on the Dollar Index indicates a possible downtrend," Amit Pabari, managing director, CR Forex Advisors told moneycontrol.

Slight Setback For Importers

For importers, depreciating rupee may be a bigger problem. The surge in import costs, alongside the rise in oil prices, is poised to intensify inflationary trends. This increase in expenditures for imports, when paired with the escalating prices of oil, spells a potential uptick in inflation, affecting economic stability.

The heightened expenses linked to importing goods, together with the soaring costs of oil, are expected to amplify inflation pressures. This scenario suggests an imminent challenge in managing inflation due to the compounded effect of rising import bills and oil prices.

"Brent oil slipped to $ 73.61 per barrel as a threat from supply disruption due to a storm in Gulf of Mexico subsided. Also the Chinese stimulus of $ 1.4 billion fell short of expectations and the murky forward guidance hinted only at a modest stimulus for housing and consumption. The Chinese authorities may have left room for policies of the new US administration. The CNH was near 7.1951 this morning a bit week," said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.

Long-time Benefits For Exporters

On the other hand, for exporters - the sliding value of the rupee, despite concerns, presents a unique opportunity for India's economic fortification. As the rupee weakens, India emerges as a more competitive player on the world stage, attracting foreign investors and buyers.

This shift is especially beneficial for India's vast array of exports, which range from basic commodities to specialized products like textiles and sports equipment. The reduced currency value not only bolsters India's position in the global market but also cements its status as a key sourcing destination amidst the global push for supply chain diversification from China.

Critics often highlight the potential pitfalls of using currency depreciation as a strategy to boost exports, citing it could spark a detrimental competition among nations. However, evidence from countries such as Japan and China showcases the tangible benefits of such an approach in achieving export-driven growth.

Concerns around inflation, the rising cost of imported materials, and the possibility of buyers demanding price reductions are significant but are somewhat alleviated by the fixed nature of international trade agreements, where currency fluctuations do not directly alter established pricing contracts.

Where Will The Rupee Move From Here?

The fluctuations of the Indian rupee against the US dollar are a reflection of the interplay between domestic economic policies and international market dynamics. These movements have far-reaching implications for businesses, investors, and the broader economy. With the US Federal Reserve expected to cut rates further, the rupee can see a slight improvement in the coming months. The Indian currency is expected to also remain stable due to strong economic prospects.