Rupee Strengthens on RBI Interest Rate Hike
The Rupee strengthened against the USD on the news that the Reserve Bank of India hiked its repo interest rate to a higher-than-expected level of 4.9 percent versus the expected 4.8 percent and the previous 4.4 percent.
Inflation in the world’s third-largest economy soared to 7.9 percent in April, well beyond the target level of 4 percent targeted by India’s policy makers.
The RBI’s hawkish move is timely as the currencies of newly-industrialised countries like India are facing major currencies like the USD and GBP. These currencies have strengthened after successive months of monetary tightening, putting the INR at a disadvantage.
What does this mean for India’s economy? In terms of currency exchange and trading, the INR is on the weaker side of exchange rates. On the upside, this makes India’s domestic goods and services competitive. On the downside, there are more capital outflows as businesses and individuals exchange their Rupees and keep their savings in foreign currencies like the USD to protect against the INR’s weakness. In addition, imported goods like fuel and consumer items are less affordable. Travelling abroad and buying foreign goods is more difficult when the domestic currency is weaker than other currencies.
Will the RBI’s interest rate hike shore up the Rupee? Probably, at least in the short term. The outlook for India’s economy is relatively optimistic, with Governor Shaktikanta Das forecasting a growth rate of 7.2 percent for the 2021-2022 full year. For the Rupee to regain further strength against the USD, economic growth would need to stay on track as expected and the RBI may decide to raise its repo rate again in the near term.
Most economies, including India’s, are struggling with inflation caused by high crude oil prices pressured upwards by the conflict in Ukraine. India’s reliance on foreign fuel imports weighs on the economy and at the time of writing, spot crude oil prices are still well above $100 per barrel.
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Quick Tip
What is the INR?
The INR is the currency code of the Indian Rupee, India’s national monetary unit. Classified as a newly-industrialised economy, India’s free-floating currency is supported by GDP growth of around 7 percent per year.
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