Rupee's Performance and Economic Implications
The Indian rupee has experienced a significant decline against the US dollar, marking its seventh consecutive year of depreciation. This trend introduces import-fed inflation risks and complicates decisions on fund costs amidst slow economic growth.
Factors Influencing the Rupee's Decline
- The rupee's depreciation is common in emerging markets but this year witnessed a pronounced decline post a period of stability.
- The US Federal Reserve’s significant rate cut in September 2024, the first in four years, triggered increased volatility and depreciation of the rupee.
- Despite weathering a stock-market volatility earlier in the year, the Indian currency weakened after the Fed's rate reduction, aligning with global financial trends.
Comparison with Other Currencies
- The South Korean won has declined about four times more than the rupee at 13% on a weekly rolling basis.
- The Indonesian Rupiah fell 4.3% over the same period.
- Currencies of Mexico and Brazil experienced even steeper declines at over 16% and 21%, respectively.
Global Economic Outlook
- The IMF predicts a "stable yet underwhelming" global economy in 2025, with a growth rate of 3.2%.
- Potential risks include financial market volatility and the impact of new trade policies following the US presidential election.
Challenges and Policy Implications for India
- India faces challenges in maintaining export resilience amid potential tariff barriers and competitive devaluation in Asia.
- Despite a narrowing current account gap in September, expectations are for it to widen, increasing pressure on the rupee.
- Policymakers must address the potential inflation puzzle due to import costs in the fast-growing Indian economy.
