Rupee 4-Year Low / Rupee Plunges to 4-Year Low: What This Means for Your Petrol, EMI, and Inflation

The Indian rupee closed at an all-time low of 89. 66 against the US dollar on Friday, marking its biggest single-day fall in nearly four years. This significant depreciation has not only instilled fear among currency traders and analysts but also threatens to derail several aspirations of the common person. Experts suggest that the rupee could see further declines in the coming days, with some even predicting it might cross the 91 mark by the end of the year.

The Sharp Decline of the Rupee

On Friday, the rupee witnessed a substantial fall of 98 paise, closing at 89. 66 against the US dollar. This decline was primarily driven by heavy dollar demand in the domestic foreign exchange market, coupled with widespread selling pressure in local and global equity markets and trade-related uncertainties, while this marks the largest single-day drop in approximately four years, with the previous record being a 99-paise fall against the dollar on February 24, 2022. The rupee opened relatively stable at 88, while 67 in the interbank foreign currency exchange market but became highly volatile in the afternoon session, fluctuating between a high of 88. 59 and a low of 89, while 66 during intraday trading. On Thursday, the rupee had closed 20 paise weaker at 88. 68 against the US dollar.

Annual Performance and Future Projections

Looking at the current year, the rupee has experienced a significant depreciation against the dollar. According to data, the rupee closed at 85. 64 on the last trading day of the previous year. Since then, it has fallen by 4. 02 rupees, or 4. 69 percent. Plus, since November 17, the rupee has seen a decline of 1. 21 percent, or 1. 07 rupees, from its closing level of 88. 59 on that day, while experts believe that the rupee's downward trend is unlikely to halt soon. Anuj Gupta, Director of Wealth Management, suggests that the rupee could cross the 91 level by the year-end, while he attributes this to the US Federal Reserve's signals of a prolonged rate pause, which is expected to strengthen the dollar and weaken the rupee. Predicting the long-term trajectory of the rupee remains challenging. India stands as the world's third-largest importer of crude oil. A depreciation of the rupee against the dollar directly impacts the cost of petrol and diesel. Despite a decline in global crude oil prices, which are currently hovering around $62 per barrel, the significant fall in the rupee means that the prospect of cheaper petrol and diesel in India has diminished. The weaker rupee makes even cheaper crude oil more expensive for India, placing a direct burden on the country's consumers.

Impact on Everyday Life: Petrol and Diesel Prices

Threat of Rising Inflation

The rupee's depreciation poses a significant risk of increasing imported inflation within the country. When the rupee falls, India has to spend more dollars to purchase foreign goods. This makes imported products more expensive in India, which, in turn, contributes to an overall increase in inflation. While the country's inflation rate is currently below 1 percent, the rupee's fall could potentially push these figures higher, impacting household budgets and purchasing power.

Uncertainty Over Interest Rate Cuts

Until recently, many experts were predicting that the Reserve Bank of India (RBI) might cut interest rates by 0. 25 percent to 0, while 50 percent in December. However, the substantial fall in the rupee could put a halt to this expectation. The RBI might decide to hold interest rates steady once again, citing global market uncertainties and the rupee's depreciation as reasons. The last time interest rates saw a cut was in June, after which they were kept. On hold in the August and October policy meetings, indicating a cautious approach by the central bank.

Pressure on Foreign Exchange Reserves

The rupee's depreciation is also expected to impact India's foreign currency reserves, while as India needs to spend more dollars and other foreign currencies to purchase imported goods, the country's foreign exchange reserves will likely face pressure. Currently, India's foreign exchange reserves stand at over $692 billion, but a continuous decline in the rupee could affect this figure, which isn't a favorable development for the nation's economy and its financial stability.

Reasons Behind the Steep Fall

CR Forex Advisors noted that Friday witnessed a dramatic surge in the dollar against the Indian rupee, breaking its all-time high. This sudden acceleration caught the market completely by surprise. Unlike previous sessions where news flow dictated price movements, this shift was primarily. Demand-based, driven by unexpected dollar buying at a time when supply was low. What made this shift even more impactful was that all other major indicators remained broadly stable – the Dollar Index, crude oil prices, emerging market currencies, and even gold showed no significant changes. This calm backdrop reinforced that Friday's dollar/rupee surge wasn't due to global signals but purely due to domestic dollar demand outstripping available supply. On top of that, concerns about a potential bubble forming around Artificial Intelligence-linked technology stocks and fresh withdrawals of foreign capital also dampened investor sentiment.

Global Market Dynamics and Risk-Off Sentiment

Anindya Banerjee, Head of Research for Currency, Commodities, and Interest Rate Derivatives at Kotak Securities, stated that global risk-off sentiment, following a heavy overnight fall in cryptocurrency and AI-linked technology stocks, has spread to currency markets. Banerjee noted that the sudden reduction in risk-taking is putting increased pressure on emerging market currencies, including the Indian rupee, while the uncertainty surrounding the proposed India-US trade agreement further exacerbates this pressure, as markets had hoped for clarity on the bilateral economic landscape. With no definite timeline set, sentiment remains fragile. Meanwhile, the dollar index, which measures the greenback's strength against a basket of six currencies, rose 0, while 09 percent to 100. 17. Global oil benchmark Brent crude futures traded 2, while 18 percent lower at $62. 00 per barrel. On the domestic equity market front, the Sensex closed 400, while 76 points or 0. 47 percent lower at 85,231, while 92, while the Nifty fell 124. 00 points or 0. 47 percent to 26,068. 15, while according to exchange data, foreign institutional investors were net sellers of shares worth Rs 1,766. 05 crore on Thursday.

RBI's Stance on Rupee Volatility

Reserve Bank Governor Sanjay Malhotra stated on Thursday that the. Central bank doesn't target any specific level for the rupee. He clarified that the recent depreciation of the rupee against the US dollar is primarily due to trade uncertainties after tariffs were imposed by the US administration. Malhotra explained at an event in the national capital that it's for the market to decide; it's a financial instrument, and there is demand for the dollar. If the demand for the dollar increases, the rupee falls; and if the demand for the rupee increases, the dollar falls, making the rupee stronger. The Governor also expressed confidence that India would secure a favorable trade. Agreement with the US, which would help ease pressure on the current account.