The Indian rupee breached the psychologically significant exchange rate level of 80 to a US dollar in early trade on Tuesday. According to a Bloomberg report, the rupee declined to 80.06 per dollar.
What is the rupee exchange rate?
The rupee’s exchange rate vis-à-vis the US dollar is essentially the number of rupees one needs to buy a single US dollar. This is an important metric not just to buy American goods but also a whole host of other goods and services (say crude oil) for which Indian citizens and companies need dollars.
When the rupee depreciates, buying (importing) something from outside India becomes costlier. There is a flip side too. By the same logic, if one is trying to sell (export) goods and services to the rest of the world (especially the US), a falling rupee makes India’s products more competitive because depreciation makes it cheaper for foreigners to buy Indian products.
Is the rupee the only currency to depreciate?
No, the dollar has been appreciating against all currencies including the euro and Japanese yen etc. In fact, the rupee has appreciated against several currencies such as the euro.
Does that mean the rupee is in safe territory?
It is important to understand the role of RBI in “managing” the rupee’s exchange rate. If the exchange rate was fully determined by the market, then it would have fluctuated sharply — both when the rupee appreciated and when it depreciated.
But the RBI does not allow sharp fluctuations in the rupee’s exchange rate. It intervenes to smoothen the fall or restrict the rise. It softens the fall by selling dollars in the market, a move that reduces the gap between the demand for rupees vis-à-vis dollars. This is what leads to a fall in India’s foreign exchange reserves. When RBI wants to hold back the rupee from appreciating then it takes away excess dollars from the market — this is what leads to a rise in India’s foreign exchange reserves.
As things stand, the rupee is expected to fall further and could reach up to the 82 to a dollar mark in the coming months.