What’s Happening?
The value of the Indian rupee has been declining this year for two big reasons - foreign investors exiting the Indian markets and a rise in dollar buying. After the US Federal Reserve announced to hike interest rates due to the Russia-Ukraine war, foreign investors pulled out enormous cash from the Indian stocks. When foreign investors redeem their investments, they get paid in rupee, which is later converted into dollars. As a result, the dollar strengthens, and the demand for the rupee declines. Something that has happened this year.
How Further Will It Fall?
Looking at the current global trend, market experts believe the rupee will depreciate further this week until 78.70 amid strong dollar and persistent foreign funds outflows. A falling rupee will push inflation to elevate, trigger interest rates and make the stock market volatile.
Should This Concern You?
Though there are upsides to currency depreciation in the long term -- such as:
(i) a rise in exports,
(ii) tourists would rush to India, and
(iii) India becomes attractive for foreigners to invest in IPOs --
the downsides in the short-run weigh more. The biggest negative effect of the falling rupee will be inflation, which is already at an all-time high.
What Lies Ahead?
The RBI has beefed up its intervention in the foreign exchange market. In April, the RBI sold $2 billion on a net basis in the spot market – a record high – which slowed the pace of currency depreciation. RBI Governor Shaktikanta Das said that the central bank did not allow a runaway currency depreciation.
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