Indian Rupee depreciates 2.5% against US Dollar in contrast to strengthening Asian currencies including Chinese Yuan and Japanese Yen
The year 2024 has wreaked changes in the currencies markets of Asia and it has posted higher Foreign Direct Investment with several Asian currencies surging against the US dollar. These changes can be attributed to various economic and geopolitical conditions like improving economic activity, versatility in maintaining forex reserves, and alteration of policy of regional central banks. However, the Indian Rupee has been a prominent exception and has fallen against the dollar when most of the other regional currencies have been appreciating.
Many Asian currencies have seen substantial appreciation against the US dollar since the start of 2024. Notably, the Chinese Yuan (CNY), Japanese Yen (JPY) and Singapore Dollar strengthened markedly against a broad-based weaker US dollar backdrop given underlying economic realities on ground, central bank policies as well as geopolitical dynamics. By 2024 the Chinese Yuan appreciated around four percent (4%); approximately three percent (3%) Japanese Yen increased its value; by nearly two point eight percent (2.8%) Singapore Dollar also rose in comparison to the US Dollar. Despite the general appreciation of Asia, the Indian Rupee (INR) has begun trending weaker against the dollar in 2024. The INR is recently trading at 83.50 INR/USD, which marks almost 2.5% depreciation, year-to-date, after moving from levels of 81.50-81.80 INR/USD levels back in January of this year.
India has been facing high inflation, with the annualized consumer price index hitting 6.3 per cent in July 2024 – above the Reserve Bank of India’s target range of 2 to 6 percent. These inflationary pressures, driven by rising food and fuel prices have eroded the purchasing power of the Rupee thereby dampening consumer sentiment. GDP growth in India is also starting to slow with economists forecasting the rate of expansion will decelerate again in 2024 and reach about 5%. The slowing down is largely driven by weakening of domestic demand but also the headwinds from the external world has rattled the imputed integrity of Rupee among foreign long term investors. This has been led by a rise in import costs, chiefly crude oil; and anemic export growth. Similarly, increasing Current Account Deficit (CAD) also exploits more U.S. dollars to finance imports by which Rupee will be touching the lower trail of USD. The global increase in energy prices has worsened matters, leading to higher import bills and putting an additional burden on India’s balance of payments.
Also, there has been a prominent flight of foreign portfolio investments (FPIs) out of India’s stock markets in 2024. In the middle of 2024, FPIs had already withdrawn about 7 billion dollars from Indian stocks due to fears over the country’s economy and high inflation. This capital flight coupled with its negative impact on rupee values leads us to believe that foreign investment might be taking a leave from rupee. On the other hand, some other Asian nations have seen foreign portfolio investments (FPIs) constantly coming in or increasing their inflows which helped support these countries’ currencies. For this reason, the Indian asset attractiveness has thus played a part in rupee depreciation. In an attempt to reduce inflation, the Reserve Bank of India has raised interest rates but not to an extent that can bring large volumes of foreign funds into the country. However, these movements also include protecting sufficient amounts of foreign exchange reserves which stood at USD 586 billion as at August 2024 down from USD 620 billion early during the year
In the coming years, global economic trends, monetary policies, and geopolitical developments will play significant roles in influencing the performance of Asian currencies including among others the Indian Rupee. In order to stabilize its currency and avoid further depreciation, it must deal with issues like inflation and current account deficit. On the other hand, if their economic momentum continues together with good governance policies, other Asian economies may see stronger currencies. In summary therefore; it is a region of contrasts as evidenced by the Indian Rupee’s underperformance making it difficult to establish an equilibrium between domestic and international variables that affect foreign exchange transactions. Policymakers and investors would need to be observant at all times lest they suffer economic instability leading to loss of funds through poor management hence foregoing growth in certain economies.
