Data | Why is the Indian rupee weakening

Indian rupee’s exchange rate slid past the 76-per-U.S.-dollar-mark on December 16 as trade gap widened and foreign investors pulled out funds from equities

Image used for representational purpose.

On December 16, the Indian rupee’s exchange rate slid past the 76-per-U.S.-dollar-mark for the first time since June 2020 and stood at 76.25. It had fallen beyond 76 in March 2020 when COVID-19 cases surged and economies came to a grinding halt. However, this time its fall was driven by widening trade deficit and foreign investors pulling out funds from equities. India’s trade gap widened to a record high of $22.9 billion on account of rise in imports. Foreign portfolio investments (FPI) also plunged for the third consecutive month, thus weakening the rupee further. But the rupee’s fall is modest when compared to the currencies of other emerging economies.

Tumbling down

The chart shows the rupee’s U.S. dollar exchange rate between January 2010 and December 2021. The rupee breached the 76-to-a-dollar mark on December 16, an 18-month low. It had first slipped past the 76-mark in March 2020 on account of global restrictions imposed to stop the COVID-19 spread and heightened demand for the safe haven greenback.

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Modest fall

The chart shows the year-to-date % change in the currency value of select emerging economies as on December 16, 2021. While the rupee tumbled 3.7%, its fall was relatively modest compared to the currencies of other economies.

 

Widening trade deficit

One of the factors that impacted the Indian unit’s weakness was the record high trade deficit in November. The chart shows India’s trade balance (in $billion) between April 2019 and Nov. 2021. In November, the trade deficit widened to $22.9 billion due to higher imports and slow growth in exports year-on-year.

 

Stock market exodus

The other reason for the rupee’s fall is that a significant number of foreign investors have withdrawn from Indian equities. December is the third consecutive month that foreign outflows have been higher with equities being hit the hardest. As on December 23, foreign portfolio investors pulled out ₹17,677 crore from Indian stock markets.

 

Source: IMF, Commerce Ministry, NSDL