Amid tightening monetary conditions, a risk-off attitude, and ongoing outflows from domestic markets, the Indian rupee slipped below the critical level of 80 to 80.05 against the US dollar in intraday trading on July 19, 2022, raising fears of high inflation due to imports. India's policymakers implemented a range of measures to prevent the slide of the rupee, from intervention to hiking import taxes on gold, as the pressure of inflation on imports increased due to the lower value of the rupee. As the hawkish Federal Reserve draws money to the US, currencies from other developing countries are also feeling the pressure.
Indian Rupee Strong Against Other Currencies
The value of the Indian rupee decreased against the US dollar but increased against other major currencies such as the euro and Japanese yen. India’s Finance Minister Nirmala Sitharaman noted that the rupee increased in value against these currencies in 2022 because they declined more than the rupee against the US dollar.
What Happens if the Rupee Crosses 100-Mark Against the Dollar?
Importers would face the immediate impact of the weakening rupee. However, exporters would benefit since they would get higher payments. The cost of petrol would also change if the rupee crossed the 100-mark. As India imports most of the crude oil it needs, the prices of gasoline and diesel would shoot up. The increasing cost of carrying goods and services would have a cascading effect on other goods, and inflation would increase as a result. The cost of government subsidies would likewise go up.
Inflation Risk in India?
Most of India's inflationary pressure is likely to come from high prices of imports, even if commodity prices decline significantly from their peak. 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 US dollar raise questions about the country's current account deficit this fiscal year. The RBI will have to explain why it could not manage inflation within the designated band, as it is predicted to increase in the coming months.
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