Indian Rupee Plummets to Record Low Amidst Fed's Monetary Tightening

The Indian rupee has hit a record low against the US dollar, with the exchange rate reaching 82.77 on October 20, 2022. This depreciation aligns with the performance of other currencies paired with the dollar, indicating broader global trends. The Reserve Bank of India (RBI) has been intervening to stabilize the rupee, but the persistent decline suggests underlying economic challenges.

The Indian rupee's depreciation can be partially attributed to the US Federal Reserve's monetary policy. The Fed's tightening policy, aimed at combating inflation, has led to a strengthening US dollar. This, in turn, has put pressure on emerging market currencies like the Indian rupee, as investors seek higher returns in the US. The rupee has depreciated by 8.5% against the dollar since January 2022, reaching an all-time low of 82.77 in October.



However, the Indian Rupee's depreciation to a record low against the dollar is not solely driven by global factors like the Fed's policy. Domestic economic factors, such as inflation and fiscal deficits, also play a significant role. Inflation, currently at 7.04% (as of Dec 2024), erodes purchasing power and increases the cost of imports, putting pressure on the rupee. Fiscal deficits, projected at 6.4% of GDP in 2024-25, also contribute to the rupee's weakness by increasing government borrowing and crowding out private investment. These domestic factors, combined with global influences, are driving the rupee's depreciation.

The Indian rupee's depreciation has implications for both external and fiscal deficits, impacting the overall economy. A weaker rupee makes imports more expensive, affecting sectors that heavily rely on imported goods. It can also result in inflationary pressures, as the cost of imported raw materials rises.

The Fed's interest rate hikes have a significant impact on foreign investment in Indian markets, as higher yields in the US make Indian assets less attractive. This reduced foreign investment, coupled with the US's tightening monetary policy, contributes to the rupee's depreciation. To mitigate this, the RBI has been intervening in the foreign exchange market, but the rupee's decline highlights the need for structural reforms to enhance India's economic resilience.

The Indian rupee's depreciation is not an isolated incident but part of a broader trend affecting Asian currencies. The Federal Reserve's tightening monetary policy has weighed heavily on emerging markets, with Asian currencies particularly vulnerable. The rupee's decline of 8.5% against the dollar since January aligns with the performance of other currencies paired with the dollar, indicating a regional trend. This reaction is partly due to Asia's trade dependence on the US, which makes its currencies sensitive to changes in US interest rates. However, the Indian rupee's depreciation also reflects domestic factors, such as high inflation and a widening current account deficit. To mitigate these challenges, India is actively working towards internationalizing the rupee, fostering global trade negotiations in INR, and reducing dependence on third currencies like the USD.

In conclusion, the Indian rupee's depreciation to a record low against the dollar is a result of both global and domestic factors. The US Federal Reserve's monetary policy, combined with domestic economic challenges, has put pressure on the rupee. To address these issues, India must focus on structural reforms and internationalizing the rupee to enhance its economic resilience.