The Indian rupee fell to a record low due to a strong dollar and rising crude oil prices. The fall of the rupee may increase pressure on inflation, import bill and trade deficit, which is likely to impact the economy.
Business News: On Monday, the Indian Rupee reached a new record low against the US Dollar. There was heavy pressure on the rupee due to increasing uncertainty in global markets, sharp rise in crude oil prices and investors turning towards safer investment options. The rupee fell nearly 0.6 percent against the dollar to 92.3350 during trading. Earlier last week it was at the level of 92.3025, which was considered to be the lowest level till that time. But the fall on Monday broke that record too.
Increasing geopolitical tensions globally have increased the concerns of the markets. Volatility has increased in international markets following the recent military action initiated by the US and Israel against Iran. Investors are moving towards the dollar which is considered safe by withdrawing money from risky markets. Due to this, the pressure on the currencies of emerging economies has increased and the Indian Rupee is also not untouched by this.
Sharp rise in crude oil prices
A major reason for the increasing pressure on the rupee is the sharp increase in crude oil prices. There has been a huge jump in the prices of Brent Crude Oil in the international market in recent times. According to the report, the price of Brent Crude increased by about 26.4 percent to reach 117.16 dollars per barrel. At the same time, during early trading in Asian markets, its price remained around 116.4 dollars per barrel.
This rise in oil prices has become a matter of concern for the global markets. Especially for those countries whose economy is largely dependent on imported energy. India is also among those countries where the major energy requirement is met through imports. In such a situation, the increase in oil prices can have a direct impact on the country’s economy.
Why are oil prices important for India?
India is the third largest importer of crude oil in the world. The country imports a large part of its energy needs from abroad. For this reason, every change in oil prices in the international market directly affects the Indian economy.
When crude oil prices increase in the global market, India’s total import bill also increases rapidly. Apart from this, oil prices are fixed in American dollars. In such a situation, if the rupee weakens, then India has to spend more rupees to buy the same quantity of crude oil. This means that rising oil prices and weak rupee together increase the country’s economic pressure.
The increase in oil imports also impacts the trade deficit. If imports are more and exports are less then the trade deficit of the country increases. This may create further pressure on the rupee. This is the reason why whenever there is a sharp rise in the prices of crude oil, an immediate reaction is seen in the currency markets.
Inflation may be affected
Rising oil prices and weak rupee can have the biggest impact on inflation in the country. Fuel is used in almost every sector. Fuel cost plays an important role in sectors like transportation, logistics, manufacturing and supply chain.
When crude oil prices increase, petrol and diesel prices may also increase. This increases the cost of freight transportation. When merchants and companies increase costs, they often pass the burden on to consumers. As a result, prices of everyday goods and services start increasing.
If inflation increases too rapidly, it affects the pockets of common people. Household expenditure increases and people’s purchasing power may decrease. This may also affect overall economic growth.
Pressure on government finances may also increase
Continuous increase in crude oil prices can also become a challenge for the financial management of the government. India spends huge amounts of money on energy imports every year. When oil prices rise, the total import bill also increases. Due to this, there is a danger of increasing the current account deficit.
Apart from this, the effect of weakening of rupee is not limited to oil only. India also imports many other essential commodities from abroad such as fertilizers, chemicals, electronic equipment and machinery. Due to weakening of rupee the cost of import of all these goods also increases.
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