Depreciation of INR against USD to record breaking low

The Indian rupee had a fresh all-time low of 77.69 per dollar and is expected to further depreciate to 79.5 per dollar by September 2022.

The rupee’s resilience has primarily been because of two reasons: Firstly, foreign fund flow in the market. According to a UN report, India received $64 billion FDIs (foreign direct investments) in 2020, the fifth-largest recipient of inflows in the world. Secondly, the Reserve Bank of India’s management of the volatility. RBI intervenes in the foreign exchange market to restrict the fluctuations in the exchange rate upto a certain limit. It aims to keep the exchange rate close to the desired value.

The fall of INR vs. USD is mainly propelled by various reasons including weak export numbers, a drop in domestic consumption, increased energy prices, and fear of soaring inflation.

However, Central banks have various measures to arbitrate and keep a check on a major change in their exchange rates through buying and selling of foreign currencies, setting new interest rates for the country to strengthen the export system, helping to increase foreign exchange earnings, and shore up reserves.

Regardless of the steps taken to secure its currency, its fortunes are tied to external factors. The continued weakness in domestic demand growth is likely to influence INR. Further selling pressure on INR is within the bounds of possibility amid rising crude oil prices and a widening trade deficit.

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