Rupee at 91 Per Dollar: Why RBI Isn’t Intervening? Everything explained!

Rupee at 91 Per Dollar: What Does It Mean?

When referring to the rupee at 91 per dollar, we mean to state:

• One has to spend 91 rupees to get $1.

• It can be established that the rupee has weakened compared to its previous value.

Indications of a weakened rupee are:

• Imports get expensive.

• Demand for the dollar rises.

• There are outflows of capital, or there is pressure to act in a global manner.

• But a weak rupee is not a disaster. This is where the RBI's policy is important to limit the effects of a weak rupee.

Recent Trend: Rupee Dollar Rate India

The rupee dollar rate in India has experienced a trend of steady depreciation over the last several years, which is a result of:

• A strong dollar in the US.

• Higher global interest rates.

• Geopolitical tensions.

• The dynamics of international trade.

Unlike recently which has experienced a steep decline in value, the steady depreciation is described as orderly, balanced, and as a result there has not been a strong tendency of the RBI to intervene in the rupee.

Indian Rupee Fall Reason: The Global Picture

The Indian rupee fall has several domestic reasons, but it also has global reasons, and it is important to examine them before examining the domestic reasons.

1. Strong US Dollar Index (DXY)

The dollar has gained strength for the following reasons:

• The Fed has maintained a high interest rate policy.

• The yields on US bonds are favoured.

• Investors are looking for US dollar monetary instruments for safety.

• When the dollar strengthens, it is not only the rupee that weakens; most currencies lose value.

2. Higher US Interest Rates for Longer

• The Fed has raised interest rates on a long-term basis.

• Global liquidity is now in the US.

• There is more pressure on the currencies of emerging markets.

• There is a reduced appetite for EM assets.

• This is among the most important reasons for the current cycle of the rupee to fall.

3. Global Risk Aversion & Geopolitics

The slowing of global growth, trade wars, and important geopolitical relations lead to the following:

• Investors moving away from riskier assets.

• Investors moving to the safe US dollar.

With such strong fundamentals, India, as an important emerging market, is impacted as well.

Domestic Factors Behind Rupee Weakness

Some degree of rupee weakness, now assessed to be 91 dollars per rupee, is also influenced by domestic factors as well as global ones.

1. Trade Deficit & Import Dependence

Imported by India:

• Crude oil

• Natural gas

• Electronics

• Defence equipment.

The increase in the dollar inflow on a higher import bill weakens the rupee.

2. Oil Prices and Energy Imports

After all, more than 85% of crude oil needs are imported by India.

What happens to oil prices? Oil prices would trigger

- more dollar outflow.

- more pressure on the rupee.

3. Capital Flows (FII Outflows)

Foreign investors (FII) sell the equities or bonds in India.

- They change rupees to dollars

- They consume more dollars

This all directly relates to the rupee dollar rate India.

Correlation between Rupee and CAD

The INR/USD pair has a long-term positive association with India's current account deficit (CAD), with the rupee likely to weaken as the CAD grows. In contrast, the INR/USD pair has a negative correlation with the capital account balance, since rising inflows often encourage rupee appreciation.

 

Why RBI Is Not Intervening

This leads to the most important question.

Why Is RBI Not More Actively Defending the Rupee at 91?

Here are the most important reasons:

1. RBI Accepts the Market-Determined Exchange Rate

India practices a managed float, not a fixed rate.

This means that

- RBI has no policy target of a particular level of the rupee.

- RBI only needs to step in to control excessive volatility.

A decline in rate for a prolonged period of time is tolerable.

2. Weak Rupee Has Economic Advantages

A weaker rupee means more assistance for India.

- more exports.

- more competitiveness of exports.

- more support for IT, pharma, and the manufacturing sectors.

- better control of current account deficit.

This is the reason RBI does not panic at every fall.

3. Forex Reserves Are Strategic, Not Unlimited

India has strong foreign exchange reserves but:

• They are meant for crises

• Not to defend a certain level for a long time

• The RBI chooses to save reserves, rather than defend a number like 90 or 91.

4. Inflation Is Under Control

One key reason for RBI intervention is imported inflation. Currently:

• CPI inflation is quite stable

• Food and fuel inflation are under control

• With inflation well contained, the RBI intervention on rupee is not urgent.

5. RBI Is Preventing Volatility, Not Direction

The RBI is intervening quietly and selectively:

• through forward contracts

• controlling liquidity

• So there are no sharp spikes

• The objective is smooth movement, rather than reversal.

USD INR Analysis: Is 91 a New Normal?

In a long-term USD INR analysis, gradual depreciation is normal for a growing economy. This is because:

• India has much higher inflation than developed countries.

• The growth in productivity is a long-term issue.

• The capital account is still in developmental stages.

• Historically, the Rupee has depreciated 3-4% annually on average.

• Thus, Rupee at 91 per dollar makes sense in the long-term context. Note that this is the norm for a growing economy and should not be seen with surprise.

Impact Of Weak Rupee On Stock Market

The effect of a weak rupee on the stock market is not always negative.

• Benefiting Sectors

• IT services

• Pharmaceuticals

• Manufacturing for Export

• Specialty chemicals

These companies earn in dollars, so profits increase in rupee terms.

• Suffering Sectors

• Oil marketing services

• Airlines

• Industries that import a lot

• Companies that have a lot of foreign debts

• This means that the stock market impact is sectoral.

 

Weak Rupee Effect on General Population

For the general population, the effects are always:

• Increased foreign travel expenses.

• The costs associated with overseas education are expensive.

• Imported electronics are expensive.

• Pressure on fuel prices (indirectly).

However, consumption of goods in the country itself will mostly not be affected unless there's a significant increase in inflation.

Should The RBI Intervene Strongly?

Yes, but only on a few occasions:

• Sudden “panic” crash.

• Market moves disorderly.

• “Too much” inflation.

• The global financial crisis.

• Currently, there are none of these situations.

Other Countries

It’s important to see that:

• The Yen is down a lot.

• The euro is down.

• Many EM currencies are down.

• India’s rupee is one of the more stable currencies among its peers.

• This gives the RBI more confidence in its actions.

What Should Investors Do?

Investors should not worry about the daily movements of the rupee and instead do the following:

• Look at the company fundamentals

• Diversify your investments across different sectors

• Do not act out of panic

• Use the weakening of the rupee at a point to pick your stocks more efficiently

• In the long run, a weak rupee does not have to be negative for equity investors.

What to Watch Going Forward

Key points that will determine the movement of the rupee:

• US Fed interest rate reductions

• Prices of crude oil

• Trade deficit of India

• Foreign institutional investors (FII) flows

• Risk sentiment of the world

• Major changes to these will determine RBI intervention on rupee.

Final Thoughts: Rupee At 91 Per Dollar Explained Simply

The rupee at 91 per dollar is mainly driven by factors outside of India. RBI is doing things, but it is strategic inactivity. The broader economy benefits from the weak rupee because it helps more trade to happen. Inflation is under control. The situation in the stock market is not great, but it is not a disaster either.

 

 

Key Takeaway

The RBI is letting the rupee be a flexible currency but is also trying to keep the economy from being very unstable. Low RBI intervention on the rupee is a smart policy decision, and not a sign of weakness, so long as there is not a lot of volatility and inflation.

 

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.