Rupee In Freefall: Here’s What It Means For Your Wallet, Savings And Daily Expenses – Everything Explained

The Indian rupee slipped to a historic low on December 3, breaching the 90-mark against the US dollar as persistent equity outflows and uncertainty over the pending India-US trade agreement weighed on market sentiment, currency experts said. The rupee opened at 89.96 and quickly weakened to 90.1325, after closing the previous session at 89.87.

Why the US Dollar Dominates

The US dollar has long served as the world’s primary reserve and trading currency. More than 64% of foreign currency deposits held by international banks are in US dollars, while the euro accounts for around 20%.

The dollar is involved in 85% of global trade, including crude oil transactions, and nearly 40% of global loans are sanctioned in dollars. In contrast, most of the world’s 180-plus currencies, including the rupee, are largely used within their national borders.

This leads to the question of why the rupee has consistently weakened against the dollar over time, and why the gap continues to widen.

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The Widening Rupee-Dollar Gap

The rupee’s weakness is partly shaped by India’s trade imbalance with the US. India imports more from the US than it exports, creating a higher demand for dollars.

Because the supply of dollars coming into India is lower than the amount required to pay for imports, businesses and banks must buy additional dollars from the foreign exchange market.

As demand rises, the dollar’s value strengthens and the rupee’s relative value declines, widening the historical gap between the two currencies.

Experts attribute the current fall to stalled India-US trade talks and heavy FPI outflows, despite a softer dollar index.

How the Slide Impacts Consumers

Although incomes may remain unchanged, the depreciation of the rupee directly affects the cost of essential goods and services. One of the biggest triggers is high crude oil prices.

Costlier crude not only raises petrol and diesel prices for vehicle owners but also increases transportation costs for essentials such as fruit, vegetables, edible oils, and foodgrains. This fuels inflation and depletes India’s foreign exchange reserves as more dollars are spent on oil imports.

Lower reserves limit India’s ability to import other goods, pushing up prices of foreign products and compounding pressure on the rupee.

For consumers, this means higher expenses across sectors.

Who Determines the Rupee’s Value?

Contrary to popular perception, neither the Indian government nor the US directly sets the rupee’s value. Foreign exchange rates are market-driven and fluctuate based on demand and supply.

Heavy imports increase the need for dollars, reducing the rupee’s value. Strong exports, however, bring more dollars into the country, making the US currency cheaper to buy and strengthening the rupee.

All these transactions occur in the global foreign exchange market, which operates with minimal government intervention.

When a Weak Rupee Can Be Beneficial

Despite the challenges, rupee depreciation offers some advantages. Non-resident Indians (NRIs) in the US, UK, UAE and other countries can send more money home because of favourable exchange rates. They can also tap into overseas loans and invest in India at a relatively lower cost.

Exporters, too, benefit from a weaker rupee as they receive more rupees per dollar earned, giving overseas buyers greater purchasing power. However, their gains are often offset by the higher cost of imported raw materials such as petroleum products, gems, jewellery inputs, electronics, and pharmaceuticals

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