Dollar strengthens: Rupee crosses 86

Why in the NEWS?

• "Rupee breaches 86 mark: A strong dollar, rising crude oil prices and selling by foreign investors in the equity market led to weakening FII inflows and depreciated the rupee."

Key Points:

• The rupee fell to a record low of 86.31 against the US dollar.
• The main reason for this was the better performance of employment data in the US, which led to the strengthening of the dollar.
• Along with this, it is expected that the US Federal Reserve will cut interest rates less this year.
• Rising crude oil prices and continuous capital outflow by foreign investors also put pressure on the rupee.

Why did the rupee cross 86?

• The Indian Rupee (INR) crossed the 86 mark against the US Dollar due to a combination of several factors, both domestic and global.

Strong Dollar:

• Economic Signals: 
  • The strength of the US dollar is linked to positive signs from the US economy. 
  • In 2023, the US non-farm payrolls data (NFP) continued to be strong. 
  • For example, 256,000 jobs were added in January 2025 against the estimated 160,000. 
  • This strengthened the dollar and foreign investors preferred to invest in US bonds and stocks.
• Dollar Value: 
  • The dollar index (DXY) which measures the strength of the dollar against 6 major currencies reached 109.95 in January 2025, the highest level in the last few years. 

Federal Reserve Policy Impact:

• Slow expectations of interest rate cuts: 
  • The dollar strengthened due to a change in stance by the US Federal Reserve. 
  • The US 10-year bond yield rose to 4.71% at the end of 2023, strengthening the dollar. 
  • This means that the US government is paying more interest, which makes investors withdraw capital from emerging markets against the dollar.
• Federal Reserve Policy: 
  • There were indications from the Federal Reserve that it would not cut interest rates much, which increased the demand for the US dollar in the markets. 
  • Global investors consider the US as a safe investment, and when US interest rates are high, they are more attracted.

Capital Outflows by Foreign Investors:

• FII Outflows: 
  • Foreign Institutional Investors (FIIs) made huge withdrawals from the Indian markets. 
  • There was an outflow of $4.2 billion from Indian markets in January 2025.
  • This capital outflow was negative for the rupee as it caused a fall in the prices of Indian stocks and bonds.
• Withdrawals from Emerging Markets: 
• Due to instability in emerging markets like India, foreign investors are shifting their capital to more stable markets like the US and Europe, which put pressure on the rupee.

Rise in Crude Oil Prices:

• India's Oil Import Dependence: 
  • India is a net importer of crude oil, and rising oil prices affect the rupee. 
  • The price of Brent crude reached US$81.23 per barrel at the end of 2023, which was negative for the rupee.
• Current account deficit: 
  • Rising crude oil prices put additional pressure on India's current account, as more imports mean more dollars to spend, which leads to a fall in the value of the rupee.

Major reasons for fall of rupee:

• Inflation and import inflation: 
  • A major reason for the weakness of the rupee is the increased cost of imported goods. 
  • Rising crude oil prices and other imported goods becoming expensive increase inflationary pressure in the domestic market.
• Market volatility: 
  • Strength of the US economy globally, rise in crude oil prices and volatility in emerging markets weakened the rupee. \
  • The Reserve Bank of India (RBI) also allowed the rupee to fall to some extent, so as not to interfere much in the market.

Future of Rupee:

• Upcoming economic signals: 
  • The value of the rupee in the future will be determined by global factors, such as crude oil prices, US interest rate policy and the stance of foreign investors. 
  • According to experts, the rupee is likely to trade in the range of 85.80 to 86.50.
• Reserve Bank of India (RBI): 
  • RBI's decision will affect the movement of the rupee. 
  • Although RBI can take limited steps to intervene in the market, monetary policy will play an important role in the stability of the rupee.