Rupee Falls Past 84: How Soaring Oil Prices and FII Outflows Are Shaping India's Currency Woes

In recent developments, the Indian Rupee has breached the psychological mark of 84 against the US dollar for the first time. This depreciation is driven by multiple global and domestic factors, creating concerns among economists and market analysts. The decline highlights vulnerabilities in India’s economic positioning amidst rising oil prices, global economic uncertainty, and Foreign Institutional Investor (FII) outflows.

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1. Impact of Rising Oil Prices

The primary driver behind the Rupee's slide past the 84 mark is the surge in global oil prices. India is heavily reliant on crude oil imports, purchasing nearly 85% of its oil from international markets. With Brent crude oil prices surging past $90 per barrel, the country's import bill has increased significantly, placing pressure on the Indian Rupee. As oil prices rise, India’s trade deficit widens, weakening the currency.

Higher oil prices also have a cascading effect on inflation, as petroleum products are crucial to various sectors of the economy. This increases the demand for US dollars to pay for the more expensive oil, further straining the Rupee​.

2. Foreign Institutional Investor (FII) Outflows

Another major factor contributing to the Rupee's decline is the persistent outflow of capital by FIIs. In times of global uncertainty, foreign investors often pull out of emerging markets like India in favor of safer assets, such as US Treasury bonds. In 2024, FIIs have been net sellers in Indian equities, largely driven by concerns over global interest rate hikes by central banks like the US Federal Reserve.

The rise in US interest rates makes US assets more attractive to investors, leading to dollar appreciation and FII outflows from Indian markets. This movement puts additional downward pressure on the Rupee​

3. Global Economic Uncertainty

The global economic environment continues to be unstable, with persistent inflation in key economies like the US and Europe, geopolitical tensions, and concerns over a potential global recession. The uncertainty stemming from these factors has led investors to seek refuge in safer assets like the US dollar, driving the greenback to strengthen against most global currencies, including the Indian Rupee.

Additionally, as central banks around the world raise interest rates to combat inflation, the cost of borrowing in the US increases, attracting more capital into dollar-denominated assets, making the dollar stronger relative to emerging market currencies.

                                                          video credit: CNBC TV 18

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4. India’s Trade Deficit and Current Account Deficit

India’s trade deficit has been widening due to higher import costs and sluggish export growth, especially in sectors like electronics and industrial goods. The higher import bill is partly driven by increasing oil prices, and this imbalance puts further strain on the Indian currency.

A widening current account deficit (CAD), which measures the gap between the value of goods and services a country exports and imports, is also contributing to the Rupee's depreciation. The CAD is projected to rise as India’s energy and import bills grow, and with a strong dollar, the cost of foreign goods and services is set to increase​.

5. RBI’s Efforts to Stabilize the Rupee

The Reserve Bank of India (RBI) has been intervening in the foreign exchange market to stabilize the Rupee, selling dollars from its foreign reserves. However, this strategy has its limits, as continued intervention could deplete India’s reserves. Additionally, the RBI has been cautious in raising interest rates too aggressively, as doing so could stifle economic growth.

Although the RBI’s actions have provided some temporary relief, the currency’s long-term stability depends on addressing the root causes—primarily the country’s trade imbalance and exposure to external shocks.

Rupee Falls Past 84

Conclusion: A Complex Mix of Factors

The Rupee's breach of 84 against the US dollar is the result of several interconnected factors, including rising oil prices, FII outflows, global economic volatility, and India’s growing trade deficit. While short-term measures like foreign exchange market intervention may offer temporary relief, a sustained recovery will depend on broader economic reforms, addressing inflationary pressures, and creating a favorable investment climate.

Rupee Falls Past 84: How Soaring Oil Prices and FII Outflows Are Shaping India's Currency Woeshttps://t.co/yvE9i0eDnz

— StepUpSuccess (@StepUpSuccess) October 11, 2024

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FAQs on the Rupee's Decline

1. Why has the Rupee crossed the 84 mark against the US dollar?

   • The Rupee crossed 84 against the dollar due to high oil prices, increased FII outflows, and global economic uncertainty. These factors weaken the currency by increasing demand for the dollar and decreasing investor confidence.

2. How do high oil prices impact the Rupee?

   • India imports the majority of its crude oil, so rising oil prices increase the import bill, widen the trade deficit, and put downward pressure on the Rupee.

3. What role do FII outflows play in the Rupee's depreciation?

   • Foreign Institutional Investors often pull capital from emerging markets like India during global uncertainty. These outflows lead to a reduced supply of foreign currency in India, causing the Rupee to weaken.

4. What is the Reserve Bank of India (RBI) doing to stabilize the Rupee?

   • The RBI has been selling dollars from its reserves to stabilize the Rupee. However, excessive intervention could reduce India’s foreign exchange reserves and limit the RBI’s future options.

5. How does the current account deficit contribute to the Rupee's decline?

   • A growing current account deficit indicates that India is importing more than it exports, leading to increased demand for foreign currency. This imbalance weakens the Rupee against other currencies, especially the US dollar.

By keeping these factors in mind, it becomes clear that multiple global and domestic elements are affecting the Indian Rupee’s performance, with oil prices, FIIs, and global uncertainty playing the central roles in this recent decline.