What explains Rupee’s recent slide vs USD

Dr. Madhavankutty G

Head – Banking, Economy & Policy – ET Prime, Times Group

The steep fall in global demand following coronavirus is definitely bad news for India, A fallout of this was oil prices coming off from USD 65 to less than USD 30 per barrel which is a huge relief on our external finances. Oil price declines, especially of the current magnitude should ideally cause INR to appreciate (strengthen) by reducing demand for US Dollars. However, despite the steep fall in oil price INR has actually depreciated (weakened) from 71 to 76.5 to the USD. What explains this movement?

Source: www.xe.com

There are a variety of reasons for Rupee weakening as oil prices, though significant, is only one among the many factors. The Table shows comparison with other emerging markets:

EM Currencies vs USD since 1.1.2020 to 13.4.2020
EM Currency% depreciation
Indian Rupee-6.74
Malaysian Ringgit-5.87
South Korean Won-5.36
Indonesian Rupiah-12.45
Russian Rouble-18.09
Brazilian Real-28.36
Singapore Dollar-5.19
Thai Baht-9.80
South African Rand-31.72
Source: x-rates.com

1) Outflows from equity markets

The rate at which one currency is exchanged for another is known as the exchange rate. If 1 US Dollar is INR 75 it means 75 Rupee can get us 1 USD. This depends on demand and supply of currency. If demand for dollar increases, supply being the same, more Rupees need to be given to receive the same amount of USD, say, 76. So this movement from 75 to 76 is called a depreciation (weakening) of the Rupee or strengthening (appreciation) of the USD. On the other hand if Dollar demand decreases, supply being constant, less of rupee need to be given for receiving the same amount of Dollar, or INR strengthens to say, 74 and USD depreciates.

During crisis investors are risk averse and flock towards the currency considered least risky.US Dollar is perceived to the safest since 1) It is a reserve currency (all countries stock USD) and 2) it is the currency for international trade. Since January 2020, foreign investors have pulled out a net USD 16 billion from Indian stock market. This meant less supply of US Dollars which led to Rupee coming under pressure. Another reason is that overseas investors are not utilizing their full quota for investment in government and corporate bonds. The utilization is only 60% and 53% respectively, which reduces Dollar inflows and weakens rupee further.

2) Pressure from overseas rupee market

There is an active market for INR in offshore markets like Dubai, Singapore and London, called the Non-Deliverable Forward (NDF). In these markets the forward rate (the rate for USD-INR to be traded after, say, 1 month but which is agreed upon now) has been trading at 50-100 paise above onshore consistently. This helps market players to benefit from the gap between onshore and offshore rates. For instance a trader can buy 1 USD by paying INR 75 onshore and sell the same 1 USD in, say, Singapore NDF market and receive INR 76.50, making a profit of INR 1.50 in the process. This is called arbitrage. So this offshore rate puts pressure on INR in the domestic market as well so that both are in equilibrium. This is another reason for INR depreciation which we see now.

3) Declining NRI remittances

Declining oil prices coupled with a global slowdown potentially reduces NRI remittances which typically averages USD 65-70 billion every year. Hence while low oil prices have a beneficial impact on the current account deficit (export minus imports), it could be partially offset by declining NRI remittances. Large scale job losses will further slowdown NRI inflows. So on a net basis, the Dollar inflows may deteriorate due to 1) Foreign investment outflows and  2) Declining NRI remittances. As we know lower inflow of Dollar means a weak Rupee.

4) Lower liquidity since Covid and lockdown

After Covid outbreak and lockdown, corporates and banks have been largely working from home which has reduced volumes by a third. This has further prompted RBI to reduce the market timings for forex trading to four hours daily ie from 10AM to 2PM vs 9AM to 5PM earlier. This reduces Dollar liquidity (supply) and increases pressure on the INR to depreciate.

5) Muted domestic and global outlook

Lastly, muted growth outlook, both domestic and global, has added to the pressure. Latest IMF report pegs India’s growth for 2020-21 at just 1.9%.Moreover, government will have to do huge spending which will magnify the fiscal deficit (difference between revenue and expenses). For a country like India the wherewithal to do indulge in huge spending could be limited but at the same time cannot shy away from it either. But confidence in our stability may come down and foreign investors might pull out Dollars. All this will weigh unfavorably on the Rupee.

Unpredictable INR movement is a challenge for exporters and importers. To be sure, several measures have been taken. Foreign investment caps have been liberalized and NRIs have been allowed to bring more funds. Such moves should help limit INR volatility to a great extent.


1) Country X had US Dollar 100 as reserves and the demand for Dollar for various purposes was also USD 100. At this point one Dollar was equal to INR 65 (known as the exchange rate of INR vs USD). Later due to a war between US and Iran oil prices increased and demand for Dollars shot up to USD 120 while reserves (supply) remaining the same at USD 100. Is Rupee expected to appreciate (strengthen) or depreciate (weaken)?. If INR has depreciated by 10%, what would be the new USD-INR exchange rate?

2) X has annual export turnover of US Dollar 100 billion comprising gems and jewellery, textiles, engineering goods among others. It is also heavily dependent on oil with average imports worth US Dollar 150 per annum. Its currency is called Dong. As of now 70 Dongs equal 1 US Dollar. A financial crisis suddenly struck its major export markets and its export volumes declined 20%. However, oil imports being a necessity remained constant. How do you expect Dong-USD exchange rate to behave?

3) Country XYZ depends heavily on inflows of Euro for its capital requirements. It received inflows of Euro 10 billion in March. However, since the investors were facing losses in their home markets due to the outbreak of a sudden epidemic, they pulled out Euro 6 billion in the first 5 days of April itself. Do you expect the domestic currency of XYZ to appreciate (strengthen) or depreciate (weaken) vis-à-vis Euro, assuming all other factors remained the same

4) The pre-decided rate at which one currency is exchanged for another at a future date is known as a forward rate. Assume that INR is trading at 75 to the USD at home. However, it is trading at 76.50 to a USD in the Singapore 1 month NDF market. How would you expect Rupee in the domestic market to move from now?

5) IMF, in its growth outlook for 2021 estimated India to grow at 6.5%. One US Dollar was equivalent to INR 70 when the outlook was released. However, due to an unexpected global financial crisis, India’s growth rate was revised downwards to 3%. What would be your outlook for the INR?

6) The Middle and Gulf regions are resorting to large scale lay off and lakhs of Indian employees are headed back home. Do you see any impact of this move on the Indian Rupee?

Dr. Madhavankutty G
Dr. Madhavankutty G

Prior to joining ET Prime, was Senior Economist with Bank of India. Prior to that was an Economist in Andhra Bank (now Union Bank of India) and also served in ICFAI University as a research fellow.
Also a Member of the IBA Monetary Policy Group, and was a visiting faculty in Economics area at NMIMS University, Navi Mumbai and K.J.Somaiya Institute, Mumbai.
Holds a Masters in Business Economics and is a Certified Associate of Indian Institute of bankers (CAIIB)


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