Rupee Weakens Past 90 Against Dollar Amid US Deal Uncertainty and FPI Outflows
The Indian Rupee has depreciated past 90 against the US dollar due to uncertainty over a US deal and continued outflow of foreign portfolio investments.
Photo by Ishant Mishra
The Indian Rupee has depreciated significantly, crossing the 90-mark against the US dollar, a level not seen in a long time. This weakening is primarily attributed to two factors: uncertainty surrounding a potential deal with the US, which might impact trade and investment flows, and continued outflows of Foreign Portfolio Investments (FPIs) from the Indian market.
When FPIs pull out money, it reduces the supply of dollars in the Indian market, putting downward pressure on the rupee. A weaker rupee makes imports more expensive and exports more competitive, but it also signals economic instability and can fuel inflation.
Key Facts
Indian Rupee crossed ₹90 against US dollar
Weakening attributed to uncertainty over US deal and FPI outflows
FPIs withdrew $2.4 billion in December
UPSC Exam Angles
Exchange Rate Mechanisms (Managed Float vs. Fixed/Floating)
Factors influencing Exchange Rate (FPI, FDI, CAD, Inflation, Interest Rates, Global Factors)
Balance of Payments (Current Account vs. Capital Account)
Impact of Rupee Depreciation (Inflation, Trade, External Debt, Investor Confidence)
Role of RBI in managing exchange rate and monetary policy
Interplay between fiscal policy and capital flows
Visual Insights
More Information
Background
Latest Developments
Practice Questions (MCQs)
1. Consider the following statements regarding the depreciation of the Indian Rupee: 1. Outflow of Foreign Portfolio Investments (FPIs) from India typically leads to a decrease in the supply of US dollars in the domestic market. 2. A significant depreciation of the Rupee makes India's imports more expensive and its exports less competitive. 3. Foreign Portfolio Investments (FPIs) are recorded under the Current Account of India's Balance of Payments. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 2 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is correct. When FPIs pull out money, they convert Rupees to Dollars, reducing the supply of dollars available in the Indian market, thus putting downward pressure on the Rupee. Statement 2 is incorrect. A weaker Rupee makes India's exports cheaper for foreign buyers, thus making them *more* competitive, not less. Imports, however, become more expensive. Statement 3 is incorrect. Foreign Portfolio Investments (FPIs) are part of the Capital Account of India's Balance of Payments, not the Current Account.
2. In the context of factors influencing the exchange rate of the Indian Rupee against the US Dollar, which of the following statements is/are correct? 1. A higher inflation rate in India compared to the US tends to cause the Rupee to depreciate. 2. An increase in the interest rate differential, with Indian rates rising relative to US rates, generally attracts capital inflows and strengthens the Rupee. 3. Intervention by the Reserve Bank of India (RBI) through selling US dollars in the open market aims to strengthen the Rupee. Select the correct answer using the code given below:
- A.1 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: D
Statement 1 is correct. Higher domestic inflation erodes the purchasing power of the Rupee, making foreign goods relatively cheaper and Indian goods relatively more expensive, leading to depreciation. Statement 2 is correct. Higher interest rates in India compared to the US make Indian assets more attractive to foreign investors, leading to capital inflows (demand for Rupee) and strengthening the Rupee. Statement 3 is correct. When the RBI sells US dollars, it increases the supply of dollars in the market and reduces the supply of Rupees, thereby strengthening the Rupee against the dollar.
3. Which of the following is NOT a likely consequence of a sustained and significant depreciation of the Indian Rupee?
- A.Increase in the cost of imported goods and services.
- B.Higher burden of servicing external debt denominated in foreign currency.
- C.Enhanced competitiveness of Indian exports in international markets.
- D.Reduction in imported inflation due to cheaper foreign goods.
Show Answer
Answer: D
A sustained and significant depreciation of the Indian Rupee makes imports more expensive, which directly leads to an increase in the cost of imported goods and services (Option A is a likely consequence). It also means that more Rupees are needed to repay foreign currency-denominated debt, increasing the burden of servicing external debt (Option B is a likely consequence). A weaker Rupee makes Indian goods cheaper for foreign buyers, thereby enhancing the competitiveness of Indian exports (Option C is a likely consequence). However, a weaker Rupee makes foreign goods more expensive in Rupee terms, leading to an *increase* in imported inflation, not a reduction (Option D is NOT a likely consequence).
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Source Articles
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