Rupee at ₹90: What’s Driving the Fall Despite India’s Strong Growth?

The Indian rupee fell past a psychological level of ₹90 per dollar to an all-time low this Wednesday.

As the Indian rupee is acting as a cushion to US tariffs, it can further deteriorate unless and until there is a trade deal finalized between the two nations. The rupee has always played a central role in India’s political landscape, as strengthening of the Indian rupee is directly linked with the growth of the economy. But what’s contradicting is the fact that India reported 8.2 percent YoY growth in Q2 GDP numbers, which is quite good compared to other global economies, and despite these good numbers, the Indian rupee is depreciating.

The Indian rupee is the worst-performing Asian currency this year despite dollar weakness. INR has depreciated almost 5 percent this year. It showed a chance of recovery in the month of May when Prime Minister Narendra Modi visited Washington DC after the fresh US tariffs were announced, in the anticipation that India would be among the first few nations to strike a deal with the US, but that didn’t happen. India was imposed with a 25 percent tariff initially, and an additional 25 percent tariff was imposed as a penalty for buying Russian crude oil. After this, the Indian rupee acted as a cushion to the higher tariff, which further depreciated it.

Now the question arises: is the economic welfare of the nation responsible for this steep fall in INR?

Let’s deep dive and understand how the rupee has performed over the past few years and what the takeaways from that are.

INR has been a depreciating asset since the 2000s. The rupee has depreciated every year, post the Modi era and also before that.

Weakening of the rupee was the topic of discussion during the 2014 election, which the opposition party BJP used aggressively against the PM Manmohan Singh government, promising rerating of the Indian rupee post the taper tantrum issue and UPA dispensation, but they failed to deliver those promises, as INR has depreciated every year since 2014.

So, as per my understanding, it is quite unfair to blame the government for rupee depreciation, because for the past 40 years the rupee has depreciated irrespective of who was in power. There are several global economic factors behind this depreciation, and those should not be the focal point of a political debate right now.”

Further in the blog, we’ll understand in depth why INR is falling.

but let’s just pause and talk about why the dollar is weakening.

This is somewhat a strategic play by the Trump government to make dollar weaker.

But how?

As we all know, Trump’s entire election campaign was based on MAGA (Make America Great Again), which means bringing back manufacturing in the US and reducing fiscal deficit to a great extent by imposing tariffs on US imports. And he deliberately wanted the FED to cut rates so that the rates on US bonds come down subsequently and people start buying bonds, which will further weaken the dollar when other global currencies are rising.

But why weaken the dollar?

Trump’s top economic advisor Steven Miran released a paper regarding the overvaluation of the dollar, which will help you understand in depth why overvaluation of the dollar is a way that makes manufacturing go away from the US to China. And they also blame this overvaluation as the reason for the high fiscal deficit.

Snapshots from the report that gave me a clarity over the overvaluation of the dollar. This is an entire topic of discussion which we will cover some other day.

Source-https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf

NOW let’s go deep and understand why INR is falling.

To understand this, we need to know what the Balance of Payments is.

It constitutes of two things — Capital Account and Current Account.