The Indian rupee has appreciated against the US Dollar and in contrast to previously, RBI (Reserve Bank of India) has let it take this course. This comes after the Indian currency took a huge hit by COVID, with Indian Express reporting that the rupee got hit harder than most currencies. Being the second-largest country hit by the Pandemic, India has been suffering high inflation for over a year now. However, the depreciation of the rupee against the US Dollar in the past is additionally one of the many causes of high inflation in India.
The Reserve Bank of India devalued the Indian rupee to the reserve Dollar. With the accession of the foreign fund, RBI has now amassed more than USD 62 billion and total reserves attain at over USD 530 billion, this is the fifth largest reserve in the world. Seeing that the availability of dollars is high currently, the RBI has decided to appreciate Rupees and lower the USD rate to regulate the rising inflation in India. Rabobank affirms that the Reserve Bank of India proposed that the strengthened rupee could support India to deal with inflation. Nevertheless, whether the devalued dollar can balance any country´s economy is itself a debate among economists.
Source: tradingeconomics (Rupee:$)
The Impact on imports and exports
Even if the appreciating rupee drops the emerging inflation in India, it will also introduce difficulty for local companies that export. It is recorded that the overvalued rupee has damaged Indian export in the past. It has also challenged the employment and expansion of SMEs. The appreciated rupee is sensitive to volatility which may make the Indian economy worse. Furthermore, a strengthened rupee challenges Indian firms that trade domestically. The imported goods would be available at a cheaper rate when the exchange rate appreciates in comparison to other currencies. This might sting Indian-made products.
With the rise of the Indian currency against the US Dollar, the Indian manufacturers are going to be left with two choices; either to maintain their rates steady and get less profit or make a decent profit by dropping their prices. The depreciating dollar influences service sectors mainly those that need to convert their foreign currency profit to the Indian rupee. Analyzing the current appreciation of the Indian rupee against the US Dollar.
Despite this late 2020 appreciation however, the Rupee was one of the worst performing currencies in the year, falling nearly 3% YTD (Year to date). Financial express reported in an article that the ‘Indian rupee remained one of the worst-performing regional currencies in 2020, despite record inflows from foreign institutional investors (FII) and foreign portfolio investors (FPI) into Indian equities.’
Though RBI may think that the weakening dollar could control the inflation in India, experts expect that the downward inflation course is going to be temporary. Financial Times admits that the global economy has an insignificant possibility to benefit from the falling dollar principally when every country is dealing with the pandemic. Factors such as global inflation, higher oil prices, and the spread of the virus itself challenge the economies to adjust globally – this will cause greater inflationary pressure by the start of 2021.
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