Daily News Analysis ‘Indian Rupee Depreciation ’ : 26 May

Why in News:

• The Indian Rupee has hit a sharp downward trajectory, sliding past 96 against the United States Dollar due to persistent trade deficits and heavy global capital flight

Factors Behind the Rupee’s Fall & Core Forex Facts:

• Market Price Determination: The exchange rate represents the price of a domestic currency relative to foreign counterparts; under a floating regime, it is determined purely by the open market forces of demand and supply.
• Merchandise Trade Deficit: India consistently runs a structural trade deficit because its tangible merchandise imports—predominantly inelastic crude oil—substantially exceed its total physical product exports.
• The Invisibles Offset: The trade deficit is partially counterbalanced by a surplus in “invisibles,” driven by foreign currency inflows from services exports (primarily software technology) and large inbound worker remittances from West Asia.
• Current Account Deficit (CAD): When the total payments India owes for merchandise and invisibles exceed what it receives, the Current Account falls into a deficit, creating an oversupply of rupees being exchanged for dollars.
• Foreign Portfolio Investment (FPI) Outflows: Unlike stable Foreign Direct Investment (FDI) tied to physical factories, speculative FPI (stocks and bonds) is highly volatile. Global geopolitical friction and rising United States (US) interest rates have caused massive FPI pullbacks from Indian assets, crushing rupee demand.