Rupee Plummets 7% in 2024, Further Decline Anticipated Amid Economic Concerns

Indian Rupee Continues to Decline Amid Crude Oil Price Hike and Foreign Capital Outflow

The Indian rupee has been under intense pressure this year due to a sharp jump in crude oil prices driven by the Middle East conflict, heavy foreign capital outflow, and increased safe-haven demand amid geopolitical uncertainties. As per investing.com, the domestic currency has declined nearly 7% against the US dollar so far this year.

On 14 May, the rupee touched a record low of 95.96 per dollar. Experts predict that the rupee's weakness is likely to continue, with some speculating that the domestic unit may touch the 100 mark if oil prices continue rising. The sustained selling by Foreign Portfolio Investors (FPIs) in the Indian market is also a major drag on the rupee.

Policymakers Take Measures to Arrest the Fall

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The government and the Reserve Bank of India (RBI) are taking measures to arrest the fall in the currency. Recently, the government raised import duties on precious metals, including gold and silver. India is one of the world's largest importers of gold, and higher duties may discourage domestic demand, thereby lowering dollar outflows and supporting the rupee.

According to a Mint poll of 10 banks, brokerages, and economists, the domestic currency may stay in the 96-98 per dollar range by the end of 2026. Policymakers are also likely to focus on improving capital inflows into the country, but the question remains whether these measures will be enough to help the rupee regain strength.

Government Measures May Not Be Enough to Strengthen the Rupee

The government's measures are important and will certainly play their role in checking the fall in the rupee. However, the bigger issue is the elevated crude oil prices. Brent Crude has been above the $100 per barrel level for more than two months now, straining India's fiscal maths. India imports nearly 88-90% of its oil requirement, and unless oil prices cool off and foreign investors start buying again, the rupee can remain under pressure despite government measures.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

According to Debopam Chaudhuri, Chief Economist at Piramal Group, assuming international gold prices remain broadly in line with FY26 levels, the increase in gold import tariffs could potentially reduce India's import bill by nearly $2.5 billion during the year. However, Chaudhuri added that by itself, this may not be sufficient to meaningfully strengthen the USD/INR.

More Measures May Be Needed to Support the Currency

Madhavi Arora, Chief Economist for Emkay Global Financial Services, believes that the import duty hike on gold and silver is one of the measures aimed at strengthening the rupee, but it is unlikely to be the only step. "There is room for additional policy action, particularly in areas such as curbing non-essential imports and moderating non-essential capital outflows," said Arora.

Manoranjan Sharma, Chief Economist at Infomerics Ratings, underscored that since India imports 85% of its crude oil needs, rising oil prices significantly increase the import bill and demand for dollars. Unless global crude prices moderate, pressure on the rupee will persist.