The rupee Tuesday declined below the critical barrier of 80 to 80.05 versus the US dollar intraday amid tightening monetary conditions, risk-off emotions, and ongoing outflows from domestic markets, raising concerns over high imported inflation.
Significant demand for dollars from oil importers due to rising crude oil prices and worries about a widening trade imbalance have also been major drivers of the sharp decline in the value of the Indian rupee, which has declined by more than 7% since January of this year.
The rupee has lost value when compared to the US dollar, but it has gained value when compared to other major currencies like the euro and the Japanese yen.
Last week, Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council, stated on Twitter, “The RBI is utilising reserves to smooth move but appropriately letting market adjustment… The import inflation brought on by rising energy costs is the only significant reason for concern. There isn’t much India can do about this in the short run due to its dependency on oil imports outside of certain local changes (such marginal tax cuts), but all such actions come at a cost.
Even if commodity prices have fallen from their peak, they are still predicted to be a significant inflation risk given that import inflation is forecast to account for over three-fourths of India’s inflationary pressure. Lower foreign exchange reserves as a result of capital outflows and the RBI’s defensive measures to stop the rupee from falling sharply against the dollar raise questions about the country’s current account deficit this fiscal year.
The dollar index maintained quiet trading sessions on Tuesday, as the rupee finished at 79.95 after trading in a neutral to range-bound range of 79.85 and 80.05.
Analysts claim that long-term inflation expectations in the US have decreased and that there is less anxiety about the US Fed tightening policy much at its upcoming meeting, which is helping the local currency and causing the dollar index to drop from multi-year highs. Furthermore, given the worries about recessionary risks and the appearance that the worst is likely to be over shortly, the US central bank may be obliged to suspend its cycle of rate increases going forward.
Since January of this year, foreign portfolio investors (FPIs) have withdrew Rs 2.37 lakh crore, and foreign exchange reserves have decreased by $62 billion from their peak of $ 642.4 billion in September 2021.
Even though commodity prices have decreased from their most recent heights, they are still high due to an anticipated 3% trade imbalance or current account deficit.
For two consecutive quarters, the Consumer Price Index (CPI)-based inflation rate has exceeded 6%, staying over the RBI’s medium-term target range of 2–6%. The majority of the inflation threats are seen to be emanating from the conflict between Ukraine and Russia’s aftermath.
The RBI will soon have to provide an explanation for why it was unable to manage inflation within the designated band, as the inflation print is predicted to remain high in the upcoming months. The RBI must provide the government with an explanation of why the inflation target was violated if the average inflation rate exceeds the 2–6% range for three consecutive quarters, as required under the monetary policy framework.
