Rupee fall not alarming, part of gradual depreciation due to global uncertainty: Economists

RBI intervenes in the foreign exchange market to manage the effects of foreign investment

Economists have downplayed concerns over the recent depreciation of the rupee, emphasising that it is part of a broader, gradual trend driven by global uncertainties rather than a sudden or alarming shift.

On Friday, the rupee crossed the 84 mark, reaching a record low of 84.11 against the dollar, driven by factors such as foreign outflows and rising oil prices due to the conflict in the Middle East.

M Govinda Rao, economist stated, "There is nothing alarming about rupee depreciation, particularly when it is overvalued. With the RBI (Reserve Bank of India) neutralising capital inflows to prevent appreciation and increasing oil prices due to the Middle East war situation, the depreciation of the rupee is only to be expected."

Sakshi Gupta, principal economist at HDFC Bank, echoed this sentiment, also noting that the rupee’s gradual fall could actually help the Indian economy regain competitiveness. “We see this as part of its gradual depreciation and not a temporary move. Continued global uncertainty surrounding China, the Middle East, and Fed (the US Federal Reserve) rate cuts is likely to keep the rupee under depreciation pressure. The RBI has enough reserves to prevent any sharp moves in the currency," she said.

Foreign institutional investors (FIIs) have offloaded $5.7 billion in stocks and $125 million in bonds this month, according to NSDL data. China's economic policies have also redirected investment flows, contributing to the rupee's downward trend. Despite these factors, RBI governor Shaktikanta Das on October 9 emphasised that the rupee remains one of the least volatile currencies among emerging market peers, reflecting India's strong macroeconomic fundamentals.

In contrast, DK Srivastava, chief policy advisor at EY India, views the rupee's fall as potentially short-term. "Oil prices remain volatile, and Indian interest rates are stable, while rates in advanced economies have declined. This may attract funds back into India. We should also wait for the outcome of the upcoming BRICS meeting, which could introduce new frameworks for global trade and reserve currencies," he said.

BRICS, the grouping originally comprising Brazil, Russia, India and China, has expanded to include South Africa, Egypt, Ethiopia, Iran, the United Arab Emirates and Saudi Arabia. The BRICS summit in Kazan, Russia, scheduled for October 22-24, will bring together leaders from 24 nations along with delegations from a total of 32 countries. BRICS, the grouping originally comprising Brazil, Russia, India and China, and since expanded to include South Africa, Egypt, Ethiopia, Iran, the United Arab Emirates and Saudi Arabia, will hold its next meeting in Kazan, Russia, from October 22 to 24.

Neutralising capital inflows

The RBI intervenes in the foreign exchange market to manage the effects of foreign investment and prevent the rupee from appreciating too much, while also controlling domestic money supply to avoid inflationary pressures.

To prevent the rupee from rising beyond its comfort zone, the RBI steps in to buy the excess foreign currency (usually US dollars) that is coming into India. By purchasing dollars, the RBI increases the supply of rupees in the market, preventing excessive appreciation of the domestic currency. This process is called "sterilisation" or "neutralisation".

A stronger rupee can make Indian exports more expensive in global markets, reducing their competitiveness. It also affects the balance of payments and could hurt sectors dependent on exports.