In late July, the Indian rupee depreciated to 83.7 per USD, marking its weakest level on record. This decline was largely influenced by the broader weakness in Asian foreign exchange markets and the impact of the 2025 Union Budget on Indian foreign exchange flows.

Budget Implications

The 2025 Union Budget unveiled plans for a smaller deficit than previously expected and a slight decrease in borrowing, maintaining a fiscally conservative approach. This stance has been crucial for attracting large foreign investments in Indian stocks and bonds, as evidenced by:

Record-highs in the Sensex this month.

Sub-7% yield on the 10-year G-Sec.

These factors have created a fiscally conservative backdrop, essential for sustaining foreign investment.

Asian Currency Trends

The depreciation of the Indian rupee was also influenced by broader trends in Asian currencies. Notably, the People’s Bank of China (PBoC) unexpectedly cut its loan prime rates to support its economy. This move has led to:

Increased bets that the PBoC will gradually accept lower valuations for the yuan.

Reduced room for the Reserve Bank of India (RBI) to support the rupee, as its usual defense against dollar buying would make Indian goods and services less competitive against Asian rivals in export markets.

RBI's Foreign Currency Reserves

The impact of these dynamics was further illustrated by the rise in foreign currency reserves held by the RBI, which reached a record high in July. This increase indicates that the RBI has been accumulating reserves, possibly as a buffer against further currency volatility.

Conclusion

The depreciation of the Indian rupee to 83.7 per USD highlights the complex interplay between domestic fiscal policies and broader regional economic trends. The fiscally conservative approach of the 2025 Union Budget, combined with the unexpected rate cuts by the PBoC, has influenced the forex market dynamics, affecting the valuation of the Indian rupee. Moving forward, the RBI's strategies and the evolving economic landscape in Asia will play crucial roles in determining the rupee's trajectory.

The record low of the rupee underscores the need for balanced monetary and fiscal policies to navigate the challenges posed by both domestic and international economic factors.

Also Read : Key Budget Highlights 2024: Essential Announcements and Updates

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