Context: The rupee has fallen to a new low of 83.5 against the dollar.

Depreciation of Rupee

• About: It refers to the decline in the value of the Rupee compared to the dollar, indicating that the Rupee has decreased in worth and strength relative to the dollar.
• Reasons for the fall:

oGeopolitical Instability: It impacts investors, triggering a chain reaction affecting currency value.

oConflict Escalation: The Iran-Israel conflict, alongside ongoing Israel-Palestine and Russia-Ukraine conflicts, threatens global supply chains.

oSupply Chain Disruption: Conflict escalation could disrupt global supply chains, leading to increased commodity prices and fueling inflation.

oInflationary Pressure: Rising commodity prices contribute to inflation, diminishing the likelihood of a US Fed interest rate cut.

oImpact on Interest Rates: Diminished chances of a US interest rate cut prompt investors to move funds to the US, affecting global financial flows, including those to India.

Impact of Weaker Rupee on Indian Economy

• Imports Become Costlier: A weaker rupee results in increased costs for importing goods and services into India.
• Benefit for Exporters: Exporters gain an advantage as their goods become more competitively priced in international markets.
• Broad Range of Affected Products: Various sectors, including electronics, machinery, plastics, and chemicals, face higher prices due to the depreciation of the rupee.
• Direct Impact on Oil Prices: The weakening of the rupee directly influences the cost of imported oil, affecting energy prices domestically.