In terms of postulates of both Purchasing Power Parity Theory and Portfolio Balance Theory of the exchange rate, the domestic currency is expected to have a depreciating bias. India with a higher rate of inflation is supposed to have slight depreciating bias w. However, post fiscally prudent budget, RBI stance change and assembly election result rupee has appreciated considerably; it moved from a high of Globally dollar index took a dip in March following a surge in the index post-Trump win as the expectation of Fiscal Policy Stimulus drove the sentiment.
The dip led to a surge in other currencies including India. The Balance of Trade also impacts Rupee movement through the interplay of demand and supply. For example, increase in import value of oil either through an increase in physical value or prices deteriorates balance of trade and increases dollar demand putting pressure on the domestic currency. On the other hand, a narrowing trade deficit often led to an appreciation of Rupee, subsequently. Though in previous few instances rate cut or easy money policy of RBI was immediately followed by Rupee appreciation by augmenting capital inflows and increasing Dollar sales by FIIs Foreign Institutional Investors , but this is apparently not the long run behaviour of the pair as can be seen from the above graph.
The impact of interest rate differential on Rupee-Dollar exchange rate cannot be neglected. It may be seen from the above, in many instances, a narrowing differential led to Rupee depreciation while increasing differential paved way for Rupee depreciation, but the pace of reaction varies from time to time.
It may be mentioned that, apart from interest rate-growth differential, stability and potential of the economy also plays an important part in determining the strength of the domestic currency. In improving US growth outlook and fundamentals, expectation of Fed normalisation stance, domestic reform agenda not materialising as expected, etc.
However, the seasonality factor has arrested sharp depreciation during that period. Chinese growth outlook is softened due to the recent tightening of monetary policy by raising the interest rates it charges in Open-Market Operations.
While balancing between economic growth and cutting leverage has been an eternal game for policy makers, the latest moves show more willingness to sacrifice growth to control risks Ref: Weakness in the growth rate of Chinese economy may tarnish overall Emerging Market outlook and also World growth outlook. This may build up pressure on almost all Emerging Market currency. Though the outlook is for Rupee depreciation, it is not going to be similar to the sell off bouts of as our economic fundamentals are better this time.
During , Rupee depreciation was fuelled by expected taper of quantitative easing by Fed. This was accentuated by a deeper decline in Indian Growth Numbers vs. Further, a high Current Account Deficit at 6.
Inflation is benign, CAD is only around 1. Low inflation expectations, high real rates, high political equity make Indian Rupee attractive. Given the same, in near term despite a depreciating bias in Rupee, the pair may hold historical high within a horizon of three to six month.
Equity , india , inflation , political , real rates , Rupee. Some achievement at last Journalism has its occasions for consternation. I have been sued for defamation. The publisher washed his hands Towards a better belief system. Work in the time of the Gig economy. The prime objective of Fixed Income investors is to have stable income on their investments with Capital protection. Ripple- Is it the next Bitcoin? Economies of overvalued Indian Capital markets.
Is Recent Stint of Appreciation Sustainable? Equity , india , inflation , political , real rates , Rupee About author Dipanwita Dutta is an economist with Punjab National Bank having more 10 years of experience.
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