Rupee Hits Record Low: ₹91.7/USD Amid FPI Outflows, Geopolitical Risks
Rupee plunges to ₹91.7/USD due to FPI outflows and geopolitical tensions.
Photo by Nick Fewings
Quick Revision
Rupee low: ₹91.65/USD
FII outflows: ₹30,000 crore+
Gold price: ₹1.5 lakh/10 gm
Silver price: ₹3.4 lakh/kg
Key Numbers
Visual Insights
Key Economic Indicators
Dashboard of key economic indicators related to the news, showing the current situation.
- Rupee/USD Exchange Rate
- ₹91.7/USD
- FII Outflows
- ₹30,000 crore
- Gold Price (MCX)
- ₹1.5 lakh/10 gm
A weaker rupee can make imports more expensive and exports cheaper.
Large outflows can put pressure on the rupee and impact the stock market.
Rising gold prices indicate safe-haven demand due to global uncertainty.
Exam Angles
GS Paper 3 (Economy): Exchange rate dynamics, factors influencing currency value
Impact of geopolitical events on the Indian economy
Role of RBI in managing exchange rate volatility
View Detailed Summary
Summary
Background
The history of the Indian Rupee is intertwined with the economic and political landscape of the Indian subcontinent. The rupee's origins can be traced back to ancient India, with the first metallic rupee believed to have been introduced by Sher Shah Suri in the 16th century. During British rule, the rupee became the standard currency, and its value was linked to the British pound.
After independence, India adopted a managed exchange rate system, where the rupee's value was pegged to a basket of currencies. The 1991 economic reforms marked a significant shift, leading to a gradual liberalization of the exchange rate regime. This transition involved moving from a fixed exchange rate to a market-determined exchange rate, allowing the rupee's value to fluctuate based on supply and demand dynamics in the foreign exchange market.
The Reserve Bank of India (RBI) plays a crucial role in managing the rupee's exchange rate through interventions in the currency market.
Latest Developments
In recent years, the Indian Rupee has faced volatility due to various global and domestic factors. The COVID-19 pandemic in 2020 led to significant economic disruption and capital outflows, putting downward pressure on the rupee. The Russia-Ukraine conflict, starting in 2022, further exacerbated global economic uncertainties and impacted the rupee's performance.
Rising inflation in developed economies, particularly the United States, has prompted aggressive interest rate hikes by central banks, leading to a stronger US dollar and weakening other currencies, including the Indian Rupee. Looking ahead, the rupee's trajectory will depend on factors such as global economic growth, geopolitical stability, and the RBI's monetary policy stance. Continued foreign portfolio investment outflows and persistent inflationary pressures could pose challenges for the rupee's stability.
Frequently Asked Questions
1. What key facts about the Rupee's recent depreciation are important for the UPSC Prelims exam?
For Prelims, remember these key facts: The rupee hit a low of ₹91.65/USD. Foreign Institutional Investors (FIIs) have withdrawn over ₹30,000 crore. Gold prices reached ₹1.5 lakh/10 gm, and silver prices crossed ₹3.4 lakh/kg.
Exam Tip
Focus on memorizing the approximate figures for the rupee's low, FII outflows, and gold/silver prices. These are frequently tested in the Prelims.
2. What are Foreign Institutional Investors (FIIs), and why are their outflows causing the Rupee to depreciate?
Foreign Institutional Investors (FIIs) are entities that invest in a country's financial markets from outside that country. When FIIs sell their investments and pull their money out of India (outflows), the demand for Indian Rupees decreases, leading to a depreciation in its value against other currencies like the US dollar.
3. How does geopolitical risk affect the Indian Rupee's value?
Geopolitical risks, such as the potential U.S. acquisition of Greenland or delays in trade deals, create uncertainty in the global economy. This uncertainty prompts investors to seek safe-haven assets like gold and the US dollar, leading to capital outflows from emerging markets like India and causing the Rupee to depreciate.
4. What are 'safe haven assets,' and why do investors flock to them during times of geopolitical instability?
Safe haven assets are investments that are expected to retain or increase in value during times of market turbulence. Investors flock to these assets, such as gold and the US dollar, because they are perceived as less risky than other investments during periods of economic or political uncertainty.
5. What is the significance of RBI Governor Sanjay Malhotra's statement that a nation should not be judged solely by its exchange rate?
RBI Governor Sanjay Malhotra's statement suggests that a country's economic health should be evaluated based on a range of indicators, not just the exchange rate. Other factors like GDP growth, inflation, employment, and social development are also important indicators of a nation's overall well-being.
6. What are the potential implications of a weaker Rupee for the common citizen?
A weaker Rupee can lead to increased import costs, making imported goods and services more expensive for consumers. This can contribute to inflation, especially for essential items like fuel and electronics. It can also affect travel and education expenses abroad.
7. Why has the Rupee depreciated to a record low recently?
The Rupee has depreciated due to a combination of factors, including continuous capital outflows by Foreign Institutional Investors (FIIs) and rising geopolitical risks. Concerns over potential U.S. acquisition of Greenland and delays in U.S. trade deals have also contributed to the decline.
8. What government initiatives or RBI actions might be expected in response to the Rupee's depreciation?
While specific initiatives aren't mentioned in the provided data, the RBI might intervene in the foreign exchange market to stabilize the Rupee. The government could also announce measures to attract foreign investment and boost economic growth.
9. What is the historical background of the Indian Rupee?
The Indian Rupee's history dates back to ancient India, with the first metallic rupee introduced by Sher Shah Suri in the 16th century. During British rule, it became the standard currency, linked to the British pound. After independence, the rupee's value has been influenced by various economic and political factors.
10. What are the important price levels to remember regarding gold and silver for the exam?
As per the article, spot gold on MCX hit ₹1.5 lakh/10 gm, and spot silver crossed ₹3.4 lakh/kg. Remember these approximate figures for potential MCQs.
Exam Tip
Note that these are spot prices on MCX, not necessarily the retail prices.
Practice Questions (MCQs)
1. Consider the following statements regarding the factors influencing the exchange rate of the Indian Rupee: 1. Foreign Portfolio Investment (FPI) flows significantly impact the Rupee's value. 2. Geopolitical risks generally lead to an appreciation of the Rupee due to increased safe-haven demand. 3. A widening current account deficit typically puts downward pressure on the Rupee. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is correct as FPI flows directly affect the supply and demand for the Rupee. Statement 3 is correct as a wider current account deficit means more Rupees are being used to purchase foreign goods and services, increasing supply and decreasing demand. Statement 2 is incorrect as geopolitical risks usually lead to a depreciation of the Rupee as investors seek safer assets.
2. With reference to the management of the Indian Rupee's exchange rate, which of the following is NOT a tool used by the Reserve Bank of India (RBI)?
- A.Open Market Operations
- B.Sterilization
- C.Capital Controls
- D.Quantitative Easing
Show Answer
Answer: D
While Open Market Operations, Sterilization, and Capital Controls are tools used by the RBI to manage the exchange rate, Quantitative Easing (QE) is primarily used to stimulate the economy by increasing the money supply and lowering interest rates. It is not directly targeted at managing the exchange rate, though it can have an indirect impact.
3. Consider the following statements regarding the historical evolution of the Indian Rupee: 1. The first metallic rupee was introduced during the reign of the Mughal Emperor Akbar. 2. After independence, India initially followed a fixed exchange rate system linked to the British Pound. 3. The 1991 economic reforms led to a complete float of the Indian Rupee, with no intervention from the RBI. Which of the statements given above is/are NOT correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: C
Statement 1 is incorrect as the first metallic rupee was introduced by Sher Shah Suri. Statement 3 is incorrect as the 1991 reforms led to a managed float, not a complete float. The RBI still intervenes in the market. Statement 2 is correct as India initially followed a fixed exchange rate system.
4. Assertion (A): A depreciating Rupee can lead to imported inflation in India. Reason (R): A weaker Rupee makes imports more expensive in local currency terms. In the context of the above statements, which of the following is correct?
- A.Both A and R are true, and R is the correct explanation of A.
- B.Both A and R are true, but R is NOT the correct explanation of A.
- C.A is true, but R is false.
- D.A is false, but R is true.
Show Answer
Answer: A
Both the assertion and the reason are true, and the reason correctly explains the assertion. A depreciating Rupee makes imports more expensive, leading to imported inflation.