Rupee’s decline to a historic low of 81.09 to the dollar will make it more expensive to import crude oil and other goods, feeding inflation, which for the past few months has continued to be above the Reserve Bank’s upper tolerance level of 6%.
In comparison to the US dollar, the value of the rupee fell 30 paise on Friday to settle at a new lifetime low of 81.09, after falling 83 paise on Thursday, which was the currency’s largest one-day loss in around seven months. After that, the rupee’s value ended the day at 80.79.
The Ukraine War increased commodity prices, which led to significant rate increases by the US Fed and, according to analysts and economists, decreased the value of all currencies globally.
With the trade imbalance increasing and institutional investors gradually withdrawing their money, the pressure on the domestic currency, which is mostly caused by the US Fed’s periodic interest rate increases, is expected to persist.
In an effort to reduce inflationary pressure, the Reserve Bank is anticipated to raise the repo-rate, or short-term lending rates, by 50 basis points when it announces its bi-monthly monetary policy later this week.
A falling rupee has an impact on local fuel prices in a country where imports account for 85% of its oil consumption and 50% of its gas needs. “A depreciating INR will partly counteract the benefit of lower commodity prices on inflation,” said Aditi Nayar, Chief Economist, ICRA. “This is also true that once the currency settles at a lower level, appreciation of the currency picks up at a dramatic pace, that is a distinct possibility given India’s strong fundamentals,” the report said.
The pressure on the domestic currency, which is mainly brought on by the US Fed’s cyclical rises in interest rates, is anticipated to endure as the trade imbalance widens and institutional investors gradually remove their capital.
The Reserve Bank is expected to increase the repo-rate, or short-term lending rates, by 50 basis points when it releases its bi-monthly monetary policy later this week in an effort to lessen inflationary pressure. In a nation where imports supply 85% of its oil needs and 50% of its gas requirements, a declining rupee has an impact on regional fuel prices.
