The Indian rupee slipped to the psychologically significant exchange rate level of 80 against the US dollar on Tuesday, taking its year-to-date fall to around 7%. At the interbank foreign exchange, the rupee opened at 80 against the US dollar, then lost ground to quote at 80.05, recording a decline of 7 paise from the last close of 79.97. The rupee has declined by about 25% since December 31, 2017.

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Why is the rupee falling against the US dollar?

The rupee is falling against the dollar because of greater demand for dollars in the market compared to demand for the rupee. The increased demand for dollars over rupees can be attributed to two reasons.

First, India is importing more goods and services than it is exporting. This is called the Current Account Deficit (CAD), which means more foreign currency (especially dollars) is flying out of India than what is coming in.

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Since the start of 2022, as the prices for crude oil and other essential commodities have started rising due to the Russia-Ukraine war, India’s CAD has widened sharply. This has put pressure on the rupee leading to depreciation (or lose its value against the dollar) because Indians are demanding more dollars to import goods from other countries.

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The second reason is decreasing investments in the Indian economy. Historically, India and most developing economies tend to have a CAD. But in India’s case, the deficit was more than made up for by foreign investors coming to invest in the country. This is known as the Capital Account Surplus. This surplus brought billions of dollars and ensured that the demand for the rupee concerning the dollar remained strong.

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But since the start of 2022, more and more foreign investors have been withdrawing money from the Indian markets. Foreign portfolio investors have withdrawn about the US $14 billion from Indian equity markets in 2022-23 so far, Finance Minister Nirmala Sitharaman informed Parliament on Monday.

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This is because the interest rates in the US are rising at much faster rates than in India. The US Federal Reserve has been aggressively hiking interest rates to control historically high inflation. The fall in investments has adversely affected the demand for Indian rupees among investors in Indian stock markets.

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The combination of these factors has led to the demand for the rupee falling sharply. However, the dollar has been appreciating against all currencies including the Euro and Japanese Yen.

The rupee is expected to depreciate further and could reach up to the 82 to a dollar mark in the coming months.