Explained: Petrol-diesel, loan EMI and inflation… which dreams were shattered by the biggest fall of the rupee in 4 years?

On Friday, the rupee witnessed its biggest decline against the dollar in nearly four years. As a result, it closed at 89.66, its lifetime low. This decline has created significant fear among currency traders and analysts in the country. 

According to experts, the rupee could see an even larger decline in the coming days. Some believe the rupee could even surpass the 91 mark by the end of the year. 

In fact, the rupee has already declined by more than 4.50 percent this year. Meanwhile, it has already declined by 1.21 percent this week.

However, the impact of the rupee's fall could shatter many dreams in the coming days. Crude oil prices have fallen in foreign markets, but the sharp fall in the rupee has dashed hopes of cheaper petrol and diesel prices. 

Meanwhile, expectations of an interest rate cut by the RBI in December may be dashed. The biggest reason for this is imported inflation. While inflation figures are quite low, the rupee's fall is likely to make imported goods more expensive in India. 

This could lead to a rise in inflation in the country. Foreign exchange reserves may also decline, which is not good for the country's economy. Let's try to understand these factors.

Rupee suffers biggest fall in 4 years

The rupee on Friday fell 98 paise to close at an all-time low of 89.66 against the US dollar, driven by heavy demand for the dollar in the domestic foreign exchange market amid widespread selling pressure in local and global stock markets and trade-related uncertainties. 

Foreign currency traders said concerns about a possible bubble building around artificial intelligence technology stocks also weighed on investor sentiment. They said fresh foreign capital outflows also added to the gloom.

The rupee opened almost stable at 88.67 on the interbank foreign currency exchange market on Friday and became highly volatile in the afternoon session. 

During the day's trading, it oscillated between a high of 88.59 and a low of 89.66. The rupee fell 98 paise to finally close at 89.66 against the dollar, marking its biggest decline in nearly four years. 

The previous biggest single-day decline was recorded at 99 paise against the dollar on February 24, 2022. On Thursday, the rupee had fallen 20 paise to close at 88.68 against the US dollar.

How much has the rupee fallen in the current year?

If we talk about the current year, the rupee has seen a significant decline against the dollar. According to data, on the last trading day of last year, the rupee closed at 85.64. Since then, the rupee has declined by 4.02 rupees, or 4.69 percent. 

Meanwhile, since November 17th, the rupee has declined by 1.21 percent, or 1.07 rupees, against the dollar. Looking at the data, the rupee closed at 88.59 on November 17th. 

According to experts, the rupee may see a further decline against the dollar in the coming days. The figure appears to be crossing the 90 mark.

Will the rupee cross 91 by the end of the year?

Experts believe the rupee's decline is unstoppable. The rupee could reach new lows by the end of the year. According to Anuj Gupta, director of wealth management, the rupee could decline further. 

He said the rupee could cross the 91 mark by the end of the year. Explaining the reason, he said the Fed's rate pause could be prolonged, potentially strengthening the dollar and weakening the rupee. It's difficult to predict where the rupee will go in the long term.

Which dreams were shattered by the fall in the rupee?

1. Petrol and Diesel Prices: India is the world's third-largest crude oil importer. If the rupee depreciates against the dollar, Indian crude oil becomes more expensive, even if it becomes cheaper. 
2. The pressure on the country's population is clearly visible. Currently, crude oil prices are hovering around $62. Even so, there's little chance of petrol and diesel prices falling in India because the rupee depreciation is making the same cheap crude oil more expensive for India.
3. Risk of rising inflation: Importantly, a depreciating rupee could increase imported inflation in the country. Whenever the rupee depreciates, India has to spend more dollars to purchase foreign goods. This makes foreign goods more expensive in India, contributing to overall inflation. However, currently, inflation in the country is below 1%.
4. Crisis on Rate Cut: Until recently, many experts were predicting that the RBI might cut interest rates by 0.25% to 0.50% in December. However, the sharp decline in the rupee could put an end to this idea. The RBI may once again decide to hold interest rates, using uncertainty in foreign markets and the rupee's decline as a shield. The last interest rate cut was in June. Subsequently, interest rates were kept on hold in the August and October policy meetings.
5. Forex prices may decline: The rupee's decline could also impact foreign currency reserves. There's a reason for this. India will now have to spend more dollars and foreign currencies to purchase foreign goods. This will impact India's foreign exchange reserves. Currently, India's foreign exchange reserves stand at over $692 billion.

Why did the rupee fall so much?

CR Forex Advisors said in a note that the dollar surged dramatically against the Indian rupee on Friday, breaching its all-time high... The sudden surge caught the market completely by surprise. 

Unlike previous sessions, where news flow dictated price movements, this move was largely demand-driven, driven by unexpected dollar buying at a time when supply was tight. 

What made this move even more impressive was that all other key indicators remained broadly stable – the dollar index, crude oil prices, emerging market currencies, and even gold remained unchanged. 

This calm backdrop further reinforced the belief that Friday's dollar/rupee rally was not driven by global cues, but purely by domestic dollar demand that exceeded available supply.

Crude oil prices fall and the dollar rises

Anindya Banerjee, Head of Research, Currency, Commodity and Interest Rate Derivatives, Kotak Securities, said that global risk-off sentiment has spread to currency markets following the sharp overnight decline in cryptocurrencies and AI-linked technology stocks. 

Banerjee said that the sudden decline in risk-on positions is putting pressure on emerging market currencies, including the Indian rupee. Uncertainty surrounding the proposed India-US trade deal, which markets had hoped would bring clarity to the bilateral economic outlook, is further adding to this pressure. With no firm timeline, sentiment remains fragile.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.09 percent to 100.17. Global oil benchmark Brent crude futures were trading 2.18 percent lower at $62.00 per barrel. 

On the domestic stock market front, the Sensex declined 400.76 points, or 0.47 percent, to close at 85,231.92, while the Nifty declined 124.00 points, or 0.47 percent, to close at 26,068.15. According to exchange data, foreign institutional investors sold shares worth Rs 1,766.05 crore on a net basis on Thursday.

RBI Governor told the solution

Reserve Bank of India Governor Sanjay Malhotra said on Thursday that the central bank does not target any level for the rupee, and that the rupee's recent decline against the US dollar is primarily due to trade uncertainties following the imposition of tariffs by the US administration.

"We don't target any level. Why is the rupee falling? (It's) due to demand. That's for the market to decide... It's a financial instrument, and there's demand for the dollar, and if the dollar demand increases, the rupee falls; and if the rupee demand increases, the dollar falls, so it strengthens," Malhotra said at an event in the national capital. 

The governor also expressed confidence that India will secure a favorable trade deal with the US, which will help ease pressure on the current account.