Domino Effect

In July this year, the Indian rupee breached the psychological mark of 80 to a dollar for the first time, as the greenback strengthened following a series of interest rate hikes by the US Federal Reserve to tame inflation.

- M.G. Arun

After steadying marginally for a while, the rupee once again breached the 80-to-a-dollar mark, sliding to a new low of 81.9 on September 28. Despite slight gains in the following days, it again fell to 81.7 to a dollar on October 3.

India’s big concern is that the RBI’s measures to stem this slide have been only partially effective so far. Moreover, with the central bank dipping into the country’s forex reserves in a bid to halt the rupee’s plunge, reserves had fallen to $537.5 billion (Rs 43.9 lakh crore) as on September 23 from the peak of $642 billion (Rs 52.4 lakh crore) on September 3 last year. This is because, on behalf of the RBI, state-run banks resort to a heavy selling of dollars.

Experts see the rupee weakening further in the coming weeks as investors continue to exit the Indian financial markets. For instance, foreign portfolio investors (FPIs) have pulled out Rs 1.68 lakh crore from the Indian stock markets so far in 2022. September alone saw an FPI outflow of Rs 7,600 crore. If the RBI continues to dip into the country’s reserves to shore up the rupee, as it will have to, it could lead to a further depletion of the reserves. The country has reserves equivalent to eight months’ value of our imports at present. Experts peg the danger mark at four months’ value, or lower.