In 2024, the Indian rupee (INR) has experienced significant volatility, primarily driven by external factors such as rising global oil prices and internal challenges related to inflationary pressures. The rupee’s performance has been affected by India’s status as a major importer of crude oil, with the currency facing downward pressure as oil prices soared due to supply disruptions. Additionally, domestic inflation concerns and global financial market turbulence have further complicated the outlook for the Indian currency.
1. Rising Global Oil Prices and India’s Vulnerability
India is the world’s third-largest importer of crude oil, and fluctuations in global oil prices have a direct impact on the Indian economy and the rupee. In 2024, global oil prices spiked due to geopolitical tensions in the Middle East and production cuts by major oil-producing countries, including OPEC and Russia. Brent crude prices surged above $100 per barrel, adding substantial pressure on India’s current account balance and increasing the cost of imports.
The rupee has historically been sensitive to oil price movements, and in 2024, the INR/USD exchange rate weakened as oil prices climbed. The increased cost of oil imports has led to a widening trade deficit, as India’s import bill grew while its export growth remained subdued. This imbalance has created additional pressure on the rupee, which fell to around 83-84 against the U.S. dollar, marking some of its weakest levels in recent years.
2. Inflationary Pressures in India
In addition to external pressures from oil prices, domestic inflation in India has been a significant concern. Inflation in India has remained above the Reserve Bank of India’s (RBI) comfort zone of 4% throughout 2024, driven by higher food and fuel prices. Food inflation, in particular, has been a major contributor to rising prices, as erratic monsoons and climate change-related disruptions have affected agricultural output.
The combination of high oil prices and elevated food costs has squeezed household budgets, reducing consumer purchasing power and raising the cost of living. The inflationary environment has also posed a challenge for businesses, as input costs have risen, leading to higher production costs and eroding profitability in several sectors.
3. RBI’s Monetary Policy Response
The Reserve Bank of India has faced a delicate balancing act in responding to rising inflation and a weakening rupee. Throughout 2023 and 2024, the RBI implemented a series of interest rate hikes to contain inflation, raising the benchmark repo rate to around 6.75%. While higher interest rates have helped to temper inflationary pressures, they have also slowed economic growth and increased borrowing costs for businesses and consumers.
Moreover, higher interest rates have not fully stabilized the rupee, as global factors—such as tightening monetary policy by the U.S. Federal Reserve and rising global bond yields—have attracted capital away from emerging markets like India. This has limited the RBI’s ability to effectively defend the rupee through monetary policy alone.
In addition to interest rate hikes, the RBI has also intervened in the foreign exchange market, selling U.S. dollars to prevent excessive rupee depreciation. However, these interventions have had limited success, as the broader macroeconomic environment remains challenging.
4. Impact of Global Financial Market Conditions
Global financial market volatility has further contributed to the rupee’s struggles in 2024. With the U.S. Federal Reserve maintaining a hawkish stance, raising interest rates to combat persistent inflation, there has been a global flight to safety, with investors flocking to U.S. dollar-denominated assets. This has strengthened the dollar, putting downward pressure on emerging market currencies like the rupee.
Moreover, global risk sentiment has been negatively impacted by geopolitical tensions, such as the ongoing Russia-Ukraine conflict and instability in the Middle East. These factors have created a risk-off environment in financial markets, leading to capital outflows from emerging markets, including India. As a result, the rupee has faced additional depreciation pressures due to reduced foreign investment in Indian assets.
5. India’s Trade Deficit and Current Account Concerns
India’s trade deficit has widened significantly in 2024, exacerbating the pressure on the rupee. The surge in oil prices has contributed to a growing import bill, while India’s exports have struggled to keep pace due to weak global demand and supply chain disruptions. The trade imbalance has led to a growing current account deficit, which has put downward pressure on the rupee as foreign exchange reserves have been drawn down to cover the deficit.
The growing trade and current account deficits have heightened concerns about India’s external vulnerabilities, particularly in an environment of tightening global liquidity. Foreign investors have become more cautious about investing in Indian assets, further weighing on the rupee’s performance.
6. Indian Government’s Response and Policy Measures
The Indian government has taken several measures to mitigate the impact of rising oil prices and inflation on the economy. These measures include reducing excise duties on fuel to provide some relief to consumers and introducing subsidies for essential commodities to help offset the impact of inflation. Additionally, the government has announced plans to increase public investment in infrastructure to stimulate economic growth and create jobs, which could support the domestic economy in the medium term.
However, these measures have had a limited effect on stabilizing the rupee in the short term, as the underlying global and domestic challenges remain significant. The government has also emphasized the need for structural reforms to improve India’s energy security and reduce its dependence on oil imports, but these initiatives will take time to yield results.
7. Outlook for the Indian Rupee
The outlook for the Indian rupee remains volatile, as it will continue to be influenced by global oil prices, inflationary pressures, and external financial market conditions. In the near term, if oil prices remain elevated and global financial markets continue to favor safe-haven assets like the U.S. dollar, the rupee may face further depreciation.
However, India’s long-term growth prospects remain strong, supported by its large and growing domestic market, favorable demographics, and ongoing reforms to improve infrastructure and the business environment. If the global economic environment stabilizes and inflation in India moderates, the rupee could see some recovery in the medium to long term. Additionally, continued efforts by the RBI to manage inflation and stabilize the currency, along with government measures to boost economic growth, will be crucial in determining the rupee’s future trajectory.
In the near term, however, the rupee’s path will be closely tied to developments in global oil markets and the direction of U.S. monetary policy, as these factors will continue to exert a strong influence on India’s currency and economy.
