Indian Rupee is passing through a difficult phase. On Thursday, it fell to the lowest level ever against the dollar. Blame the mix of reasons. For one, inflation in the US is near a multi-decade high, and the rate drop taken by Federal Reserve policy is pulling hot money into dollar assets, thus weakening other currencies in relation to the US. Is. India was also hit by the war-caused oil shock, which raised import bills and widened our trade gap. Rising Indian demand for dollars has put additional pressure on our currency. The decline in purchasing power implied by high domestic inflation can further reduce it, as well as a fall in the exchange rate, as imports that are value-inefficient in the local currency become even more expensive.
As India’s forex reserves fell below $600 billion, it was clear that our central bank was selling dollars against the rupee. As per the stated policy, it only intervenes against rate volatility, while otherwise letting it find its own float value. A jerky currency is disruptive. As our managed float gives us some flexibility in managing it, we can also explore priority-optimized strategies. Gita Gopinath’s academic work in a nuanced way around the trade-offs can be helpful in this.