Context: The Indian rupee depreciated past ₹94 per US dollar despite intervention by the Reserve Bank of India (RBI). The fall is driven by rising crude oil prices, a stronger US dollar, and global uncertainties leading to capital outflows.
- Exchange rate refers to the value of one currency in terms of another; India follows a managed floating exchange rate system, where market forces determine the rate but RBI intervenes to reduce volatility.
- Depreciation of the rupee means it takes more rupees to buy one US dollar; it makes imports costlier and exports relatively cheaper.
- India is a major importer of crude oil; higher global oil prices increase demand for dollars (to pay for imports), leading to rupee depreciation.
- A stronger US dollar globally, often due to higher US interest rates or safe-haven demand during geopolitical tensions, causes capital to flow out of emerging markets like India.
- Foreign Portfolio Investors (FPIs) withdrawing investments increase dollar demand and put downward pressure on the rupee.
- Current Account Deficit (CAD) widens when imports exceed exports, especially due to costly oil imports, weakening the currency.
- RBI intervenes in the forex market mainly through buying or selling foreign exchange reserves (primarily US dollars) to stabilize the rupee.
- When the rupee depreciates sharply, RBI sells dollars from its reserves and buys rupees, increasing dollar supply and supporting the rupee.
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