Why Is Rupee Falling Against Pound?

The Indian Rupee (INR) has been on a depreciating trend against the British Pound (GBP) for several years, with the exchange rate crossing the psychological barrier of 100 INR per GBP in recent times. This decline has raised concerns among policymakers, businesses, and individuals alike, prompting questions about the underlying causes and potential consequences.

Understanding the factors driving this depreciation requires a nuanced analysis of both global and domestic economic forces. This article delves into the complex interplay of these factors, shedding light on the reasons behind the rupee’s fall and exploring its potential implications.

Global Economic Headwinds:

1. Strengthening Pound: The British Pound has been on a strengthening trajectory, primarily due to the Bank of England‘s (BoE) proactive monetary policy tightening in response to rising inflation. As the BoE raises interest rates, the returns on Pound-denominated assets become more attractive, driving up demand for the currency and pushing its value higher.

2. Global Risk Aversion: Periods of global uncertainty, like the ongoing geopolitical tensions and recessionary fears, often trigger a flight to safety among investors. This leads to increased demand for safe-haven currencies like the US Dollar and the Pound, putting downward pressure on emerging market currencies like the INR.

3. Rising Commodity Prices: India is a net importer of commodities, particularly crude oil. The recent surge in global commodity prices has significantly increased India’s import bill, putting pressure on the rupee.

Domestic Economic Challenges:

1. Widening Current Account Deficit (CAD): India’s CAD, the difference between its exports and imports, has been widening in recent years. This is partly due to the rising import bill and partly due to sluggish export growth. A wider CAD implies higher demand for foreign currency, putting downward pressure on the rupee.

2. High Inflation: India has been grappling with high inflation, driven by both global factors and domestic supply chain disruptions. High inflation erodes the purchasing power of the rupee and makes it less attractive for investors.

3. Capital Outflows: Foreign investors have been pulling out funds from Indian markets due to global risk aversion and concerns about India’s economic growth prospects. This outflow of capital reduces the demand for the rupee, contributing to its depreciation.

4. Interest Rate Differential: While the BoE has been raising interest rates, the Reserve Bank of India (RBI) has been relatively slower in its tightening cycle. This creates a wider interest rate differential between India and the UK, making Pound-denominated assets more attractive and putting pressure on the INR.

Potential Consequences of Rupee Depreciation:

1. Costlier Imports: A weaker rupee makes imports more expensive, which can fuel inflation and hurt businesses that rely on imported inputs. This can have a cascading effect on the broader economy.

2. Debt Burden: India has a significant amount of foreign currency-denominated debt. A depreciating rupee increases the cost of servicing this debt, putting pressure on the government’s finances.

3. Impact on Investment: A volatile currency can deter foreign investors, impacting capital inflows and hindering economic growth.

4. Competitive Advantage for Exports: While a weaker rupee makes imports expensive, it also makes Indian exports more competitive in the global market. This can benefit export-oriented sectors and provide some relief to the economy.

Mitigating the Slide:

The RBI has been intervening in the forex market to manage the rupee’s volatility and prevent a sharp depreciation. Additionally, policy measures aimed at boosting exports, attracting foreign investment, and controlling inflation can help stabilize the currency.

However, addressing the structural issues contributing to the widening CAD and improving India’s overall economic competitiveness are crucial for achieving long-term currency stability.

Conclusion:

The rupee’s depreciation against the Pound is a complex phenomenon driven by a confluence of global and domestic factors. While a weaker rupee presents certain challenges, it also offers opportunities for export-oriented sectors.

Effectively managing the situation requires a multi-pronged approach, including both short-term measures to stabilize the currency and long-term structural reforms to strengthen the Indian economy.

It is important to note that currency movements are often cyclical, and the rupee’s trajectory can change course depending on future economic developments and policy actions.