Why is the Indian rupee falling?, Pg8

Key Highlights:

• The rupee-to-dollar exchange rate crossed 96 in May 2026, a significant decline from around 85 a year prior.
• India's trade deficit, where imports exceed exports, puts downward pressure on the rupee's value.
• Foreign Portfolio Investment (FPI) outflows exacerbate the rupee's depreciation as investors withdraw from Indian markets.
• The Reserve Bank of India (RBI) intervenes by using foreign exchange reserves to stabilize the rupee.
• India's forex reserves stood at approximately USD 691.11 billion at the end of March 2026, covering 10.8 months of imports.

Detailed Insights:

• The exchange rate is determined by the supply and demand for a currency, similar to market prices for goods.
• A current account deficit, where foreign currency payments exceed receipts, is typically offset by inflows through the capital account, including foreign investment and loans.
• FDI is more stable, while FPI is highly volatile, driven by speculation and sensitive to global economic conditions.
• Rapid rupee depreciation periods are characterized by worsening trade balances and FPI outflows.
• A weaker rupee can boost exports but may be limited by supply and demand constraints in Indian manufacturing.
• The RBI sells dollars from its reserves to increase the demand for rupees and slow its decline during periods of capital outflow.
• Geopolitical tensions and rising oil prices pose challenges, requiring India to manage capital outflows and reduce oil dependence.

Key Concepts Involved:

• Exchange Rate: The value of one currency in relation to another.
• Trade Deficit: When a country's imports exceed its exports.
• FPI (Foreign Portfolio Investment): Investment in financial assets like stocks and bonds.
• Forex Reserves: A country's holdings of foreign currencies and gold.