The rupee closed at 79.88 against the US dollar on Thursday, just away from breaching the psychological 80-level. Since the outbreak of Russia Ukraine war in February, the Indian currency has sunk.
However, it is important to understand what happens if the rupee hits 80 against the US dollar.
What happens when the rupee touches 80 against US dollar?
Imports become dearer: When the price of a dollar goes up, importers need to pay more for the same number of dollars. As international trade is mostly in the US dollar, importers have to pay higher prices.
Exports become cheaper: The exporters benefit from a weak rupee. If the price of a dollar rises, exporters get more money in exchange for the same number of US dollars. This leads to bigger margins.
Current account deficit rises: Current account deficit (CAD) is the difference between the payment received from selling goods to a foreign country and the payment made for buying goods from the outside. As the country imports more goods than it exports, the fall in the rupee leads to a rise in the ‘deficit’. India is already struggling with its CAD. It is likely to touch $105 billion or 3 per cent of the GDP this fiscal.
Higher inflation: When the value of the currency falls, the imports become dearer. This leads to a rise in the prices of raw materials and thus the selling prices. So, people have to pay more for the same goods.
What is the RBI doing to stop the fall of the rupee?
The Reserve Bank of India (RBI) is taking a number of measures to stabilise the value of the rupee. It has been selling US dollars in the open markets, out of its forex reserves. This increases the supply of USD in the markets, bringing down their value. However, it also leads to the depletion of forex reserves. Since February 2022, India’s forex reserves have depleted by Rs 1 trillion.
RBI has also proposed the rupee settlement mechanism. Under this, foreign companies can make foreign payments in rupees, unlike the usual US dollars. This is expected to reduce the need for US dollars for foreign trade, stabilising its value.