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Indian Currency- Asia’s worst performing currency

The Indian rupee is on track to finish the year as Asia's worst-performing currency, as accelerated depreciation has resulted in foreign investors fleeing the Indian stock market. The Indian Rupee ended a riotous year as Asia’s worst-performing currency because the accelerated depreciation has caused the foreign investors to exit the Indian stock market. It is poised for more losses as a rebound in Covid-19 cases to a record threatens to debilitate the economy.

Foreigners sold Indian stocks because Goldman Sachs Group Inc. and Nomura Holdings Inc. recently reduced their outlook for equities, citing high valuations, at a time when concerns about the omicron variant are agitating the global markets. Record-high trade deficit and the central bank’s policy divergence with the Federal Reserve have harmed the Rupee’s appeal.

The global funds pulled $4 billion of capital out of the country’s stock market resulting in a decline of the Indian Rupee by 2.2%, the most among regional markets where data is available. According to B. Prasanna, the head of global markets, sales, trading and research at ICICI bank, “The monetary policy divergence and widening current account gap have set depreciation within the rupee in the near term."

India’s trade deficit extended to an all-time high of about $23 billion in November amid higher imports resulting in rising bearish rupee calls. The ample liquidity within the banking industry, partially created by the RBI’s dollar purchases, might make it challenging for the central bank to intervene to an equivalent extent in 2022 to curb Rupee’s losses.

Depreciation in the rupee may be a double-edged sword for the Reserve Bank of India. Although a weaker rupee implies that exports from India are much more favoured, the surge in the cost of imported goods can rapidly contribute to imported inflation. The increase in import prices has a cascading effect on local prices, which rise subsequently. The depreciating Rupee may cause an additional increase in domestic fuel prices, which in turn may raise the prices of other essential items as the transportation costs will rise.

Rising commodity prices may nudge the current account into a deficit in the fiscal year that started in April, while the central bank’s quantitative easing announced last month is seen adding to the liquidity glut, worsening the Rupee’s misery.

Still, not all are pessimistic. An expected reversal in foreign inflows within the coming quarter on account of share sales in companies including Life Insurance Corp. of India (LIC) billed as India’s most significant initial public offer may cushion the Rupee.

The varying global economic landscape and the unprecedented action required to support national economics during the COVID-19 pandemic has led to several currencies, including the Indian Rupee, seeing extreme depreciation in the past year.


Gaurang Dua, Gurpriya, Harleen


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