indian rupee
The Indian rupee continues to fall due to the ongoing tension in the Middle East. On Thursday, due to increased cost of energy imports, the rupee reached its lowest level ever. India's situation has become like Japan in terms of currency. There also the yen has reached the level of 160 against the dollar, which is the lowest level after 2024. India and Japan are currently seen standing almost on the same line because the governors of both the countries are hesitant in increasing interest rates. Let us understand in this news how much challenge the RBI is facing regarding the rupee.
Reserve Bank of India Governor Sanjay Malhotra has faced many challenges for the rupee, the biggest reason behind which is believed to be the pressure of the foreign exchange market and the impact of the war that started two months ago in Iran has also been a major factor in this. This effect has also affected the Philippine peso and Indonesian rupiah. The central banks of these countries are also hesitant in increasing their policy rates, but in the last two years the Indian currency has been the worst performing currency in Asia and if this situation continues for a long time then it is not good news for the economy.
According to the ET report, the weakening of the rupee in 2025 was probably a planned strategy to protect exporters from US tariffs. After becoming governor in December 2024, Malhotra had cut the policy rate by 125 basis points. Also, RBI had infused about Rs 20 trillion into banks, which was more than the liquidity given during the pandemic. Yet this money left the banking system because global investors sold local assets and withdrew the money in dollars. The result is that funding for banks still remains tight.
Capital outflow may increase
Now, due to the problem in oil and gas supply from the Middle East, the rupee is in danger of moving towards the psychological level of 100 against the dollar. On Thursday, the rupee closed at 94.92 and had crossed 95 in the intra-day, in such a situation the capital outflow may increase further. In the last one year, foreign investors have withdrawn $26 billion from the equity market, of which $20 billion has come out since January alone. Interest rate derivatives markets are indicating that the RBI may have to withdraw its growth-friendly, easy-money policy, so that the exchange rate can be managed and the 12% decline of the last two years does not increase further. This has created a new problem for the bankers.
Danger to customers with expensive loans
When the energy crisis is going on, the number of customers taking expensive loans will also reduce. Before the closure of the Strait of Hormuz, consumer and business loans were growing at a healthy 14.5%. At that time RBI wanted to further increase lending and was thinking of giving more freedom to banks, so that the system could be at par with international standards.
The asset quality of Indian banks is still very strong, which is the best in the last decade. But from next year RBI wants banks to keep provisions in advance for possible NPA. This will be easy for private banks, but government banks which are more exposed to the MSME sector may have to clean their balance sheets. Last year, MSMEs accounted for more than 25% of the default loans of government banks. This means that banks will now be more careful in giving loans in this sector.
Challenge before banks
According to BMI report, banks will now focus on preserving asset quality more than loan growth. Till now the government has put pressure on oil refineries not to pass the burden of expensive crude oil directly on the consumer. But shortage of LPG is already troubling people. The government does not have the financial capacity to continue giving subsidies for a long time. Inflation in March was 3.4%, which is within the target of RBI. But food inflation may increase due to fear of heatwave and weak monsoon.
Is it necessary to increase interest rates?
According to the ET report, RBI should not refrain from increasing interest rates at this time. To control inflation, it has now become necessary to increase interest rates and it is difficult to avoid it. As interest rates rise, people will spend less and take less loans, which will reduce demand. If this step is not taken on time, the balance sheets of banks which are currently looking strong may get damaged. Due to increase in inflation, people's confidence in the future also weakens, which impacts the entire economy.
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