The Indian rupee has reached a historic low, marking its worst weekly performance in a month amidst significant US policy changes and Reserve Bank of India (RBI) interventions. The currency closed at 88.72 against the US dollar on Friday, recording a 0.70% weekly decline.

US Policy Changes Impact Indian Markets

Two major US policy shifts have contributed to the pressure on the Indian rupee:

1. H1-B Visa Fee Hikes: Sharp increases in H1-B visa fees could potentially impact the business models of Indian IT companies.
2. New Tariffs on Drugs: The White House announced new 100% tariffs on branded and patented drugs.

These policy changes have raised concerns about their potential impact on Indian businesses and the overall economy.

Equity Markets React

The ripple effects of these developments were felt in the Indian equity markets as well:

• The BSE Sensex and Nifty 50, India's benchmark equity indexes, each fell by 2.50% for the week.
• This decline marks the steepest drop for these indexes since late March.

RBI Intervention and Forex Reserves

The Reserve Bank of India (RBI) has taken action to mitigate steeper losses:

• The central bank intervened in the markets to prevent more significant declines in the rupee's value.
• In July, the RBI sold $2.54 billion to stabilize the rupee, marking the first month in over 11 years without any dollar purchases.
• The last time RBI did not buy dollars was in February 2014.
• This intervention came as the rupee faced significant pressure, depreciating 2.23% in July.
• The pause in purchases contributed to India's foreign exchange reserves declining from $699.74 billion on July 4 to $688.87 billion on August 1.
• Currently, India's forex reserves stand at nearly $703 billion, close to all-time highs.

Rupee Performance

• The rupee has declined around 3.65% and 3.48% year-to-date against the dollar, representing the highest depreciation after two financial years.
• External factors including uncertainty over US tariffs, the Russia-Ukraine war, Middle East tensions, and domestic foreign investor outflows have pressured the currency.

Outlook

The combination of external policy shifts and domestic market reactions has created a challenging environment for the Indian rupee. While the RBI's interventions have helped to manage the currency's decline, the situation remains dynamic. Experts note that the RBI's actions signal a shift from routine reserve accumulation to defensive interventions using both spot and forward markets.

Market participants will likely continue to monitor US policy developments and their potential impacts on Indian businesses and the broader economy. As global economic conditions evolve, the performance of the Indian rupee and domestic equity markets will remain key indicators of India's economic resilience and adaptability to international policy changes.

The Indian rupee has experienced a significant depreciation, falling 3.6% since the beginning of the year and over 6% in the past year. This decline has positioned the rupee as the third-worst performing emerging market currency, trailing only behind Argentina and Turkey.

Potential Benefits for Exporters

Despite the currency's weakness, there may be a silver lining for Indian exporters. The depreciation could help mitigate the impact of a 50% US tariff on Indian exports. For each rupee's worth of goods exported, Indian companies now receive more dollars, potentially offsetting some of the tariff-related costs.

Government's Stance

Chief Economic Advisor Anantha Nageswaran has weighed in on the situation, stating that the current rupee fall is not 'excessive'. This comment suggests that the government views the depreciation as manageable within the broader economic context.

Competitive Advantage for Local Manufacturers

The weaker rupee presents an opportunity for local manufacturers to become more competitive in both domestic and international markets. As imported alternatives become more expensive due to the currency depreciation, locally produced goods may gain an edge in pricing.

Foreign Investment and Currency Performance

The rupee's decline can be partly attributed to significant outflows of foreign portfolio investments. Foreign investors have sold ₹1,29,934 crore ($15.6 billion) worth of Indian stocks, contributing to the downward pressure on the currency.

Comparison with Other Emerging Markets

While the Indian rupee has depreciated, some other emerging market currencies have shown strength. For instance, Brazil's real has gained 16.8%. However, India's currency weakness may provide a competitive advantage in trade negotiations.

Historical Context

The rupee's real effective exchange rate is currently at levels last observed in February 2019, indicating a significant shift in its value over the past few years.

Inflation Comparison

Despite the currency depreciation, India's inflation remains relatively controlled. The retail inflation rate in August stood at 2.07%, which is substantially lower than the 30%+ inflation rates experienced in Argentina and Turkey.

While the rupee's depreciation presents challenges, it also offers potential opportunities for Indian exporters and manufacturers. The government's view that the decline is not excessive, coupled with controlled inflation, suggests a nuanced economic landscape that policymakers and businesses will need to navigate carefully in the coming months.