As of 16th June 2021, the rupee value was 73.27 and had been holding around this level for the last 10 days, post which it started depreciating gradually. As of 2nd July 2021 the rupee depreciated by 20 paise to 74.75, on 5th July 2021 it closed 43 paise higher before finally depreciating further by 15 paise and settling at 74.70 on 7th July 2021. There are various factors that are contributing to this such as rising crude oil prices, a strong dollar, the US Federal Open Market Committee (FOMC) decision, and weakened risk appetite in the domestic markets.
The relation between oil prices and currency is inverse, wherein if crude oil prices are rising the Indian rupee will depreciate. Since crude oil is traded in dollars this increases the strength of the dollar while depreciating the rupee. Additionally, rising crude oil prices puts pressure on the rupee and on India’s current account deficit as India’s import bill will rise. This can have the tendency to be inflationary as well.
The US FOMC recently gave an indication of two policy rate hikes for funds by the end of 2023 which was also one of the reasons for the dollar strengthening and rupee weakening. The Fed mentioned that the primary reason for indicating rate hikes is that the US economy is growing faster than it can, which can prove to be inflationary in nature. Furthermore, an increase in rates could cause an increased flow of investors back to the US thereby further strengthening the dollar.
Foreign institutional investors (FIIs) were also net sellers in the capital market from 1 July 2021 to 7 July 2021, with net sales of INR 2,577 crores as per data from Money Control. The pull-out of funds from the Indian markets indicates a willingness on the part of FIIs to book some profits at higher levels. This is also a contributing factor in the weakening of the rupee.
The weakening of the rupee is expected to be positive for exports of India.