Rupee breaches 90-mark against US dollar for first time

• The rupee slumped to an all-time low of 90.43 against the US dollar on December 4.  

• It is the first time the rupee breached the 90-mark per dollar.

• According to experts, a depreciating rupee will help exporters and the IT sector, but make imports costlier, thus fuelling inflation.

• Opposition parties raised concern over its impact on common citizens.

What is driving the rupee depreciation?

• The rupee has been among Asia’s weakest performers, as steep US tariffs on Indian goods hurt exports to its largest market and have dampened foreign investor appetite for Indian equities.

• As the dollar index strengthens, the rupee typically weakens as do other currencies. But right now, the US dollar index has slipped below 100, signalling its weakness. 

• Still, the rupee has continued to fall against the dollar. There are multiple reasons that are exerting pressure on the rupee.

• A key reason has been sustained outflows from equity markets by foreign institutional investors (FIIs).

• When FIIs sell Indian stocks and pull out money, the demand for US dollar increases and in turn puts pressure on the rupee.

• Another key reason behind the rupee slump has been ongoing uncertainty around US tariffs.

• Also, escalating geopolitical tension and the crash in cryptocurrencies have driven safe haven flows into the dollar.

Widespread impact

• The continued depreciation in the rupee will have a wide-ranging impact.

• India imports 90 per cent of its crude oil requirements. A major requirement of our edible oil needs is also met through imports. A weak rupee means importing oil becomes that much more expensive.

• Similarly, imported electronic parts or finished goods like laptops, imported phones and other gadgets also cost more.

• For a student studying abroad, then tuition and other expenses are also becoming dearer. For instance, if a student is spending $75,000, it would have cost Rs 56.25 lakh five years ago when the rupee was at 75 against the dollar. Now at 90, it will cost Rs 67.50 lakh, which is a sizable increase, especially for middle-class families.

• If any individual or a corporate had availed a dollar loan, repaying that would also get expensive in rupee terms. 

• Similarly, vacation abroad also becomes more expensive. If a trip cost $5,000 in 2020, you would have had to spend Rs 3.75 lakh with the rupee at 75. Now, with the rupee at 90, it will cost Rs 4.50 lakh.

• Exporters typically benefit from a falling rupee, as it makes Indian products and services abroad much more competitive. 

• However, shipments to the US, India’s largest export market, have already been under pressure, due to the steep tariffs imposed. 

• The falling rupee can also benefit services exports like business process outsourcing and software services.