Single most reason of rupee weakness is increasing current account deficit (imports are higher compared to exports). CAD increased to $13.5 billion(2% of GDP) in Dec-17 quarter from $8 billion(1.4%) in Dec-16 quarter.
What what...in detail? (Thanks to Oil and USD)
India imports ~80% of oil and it accounts for one fourth of total Indian imports. Oil import bill is expected to increase by 25% from 2017-18 because of two reasons; increase in crude price and strong dollar value to rupee. Oil is priced in dollar which means that Indian oil companies have to purchase dollar to pay oil seller in Saudi Arabia or other. Increasing crude price and strength in dollar are impacting CAD.
Crude (raw oil) prices are increasing because of production cut by gulf countries and Russia after oversupply in 2015 to decrease crude prices to depress the shale oil production in North America. Most of the oil uproducing countries work in a cartel called OPEC (Organisation of the Petroleum Exporting Countries) to control oil prices by managing oil production. In Dec-2017 OPEC and allies (like Russia) agreed to extend production cuts through 2018 but in Jun-2018 meeting they indicated that the slightly increase in oil production in 2018 in order to cover production shortfall due to economic crisis in Venezuelan, under-investment in oil by Angola and US sanctions on Iran. In-short oil production (supply) is expected to remain low compared to increasing oil consumption (demand) driven by robust global economic growth. World is expected to grow at 3.9% in 2018, highest since 2013 as per IMF.
Dollar is strengthening mainly because of two reasons; growth in US economy and reversal of quantitative easing (QE is printing new money to buy govt bonds). US economy is growing at 4.1%, fastest pace in four years driven by rising consumer spending and business investments. Strong US economy is attracting investments from all over the world for better rate of return on investments, which resulting in high demand for dollar. On top of this, US dollar is considered as a safe haven during times of global economic uncertainty (like trade war or Turkey selloff). Federal bank (similar to RBI in India) has increased interest rate in US and stopped quantitative easing in Oct 2014. Since then, they haven’t increase the dollar liquidity in the market and will reduce liquidity in late 2018 when reversal of quantitative easing will start. So demand for dollar is increasing but supply remains constant if not decreasing which resulted in appreciation of dollar compared to other currencies.
Why should I care? (GDP growth in risk)
Weak rupee will increase inflation in India. Higher inflation is a indicator to increase interest rate to curb increasing prices of goods/services through reducing liquidity in the market. It has been observed that higher interest rate decreases the consumption spending and investments (why anyone will take car loan at a higher interest rate?). Lower consumption spending and investment will hamper growth of GDP and employment.
Second Thought? (Make in India moment)
Weak rupee is a boon to exporter as Indian products will be cheaper in dollar terms. Weakness in currency can increase the competitive advantage as cost of production decreases in dollar terms. Government of India is pushing for Make in India and weak rupee is a great moment to boost export and create employment.