USD/INR – Whats causing the fall?

So rupee is on everyones mind. As i post this USD/INR cross almost hit 69 to the dollar. Much has been written on the subject. Apparently its the worst performing currency since 2009 among the pack of the so called BRIC & Indonesia & RSA. Now there are a lot of factors affecting currencies which trade in one of the most liquid markets in the world. So this topic would see a series of articles.

Of the many factors. One can point out that high and persistent inflation as one of the principal causes for rupee’s woes.

A look at the Consumer Price Inflation (CPI) Index since 2009 it has averaged ~ 9%. Cumulatively inflation has risen ~ 40% since 2009. It follows that high inflation erodes the purchasing power of a currency relative to other currencies. This also makes domestic businesses uncompetitive in the international markets since the sustained rise in general price levels leads to input cost inflation resulting in lower competitiveness. This has to be adjusted which leads to depreciation in the currency value. What follows is high interest rates to fight this high inflation and attract foreign capital.

Now, what have the authorities done to tackle this? Well for starters RBI did hike rates albeit slightly late but the quantum of the hikes left a lot to be desired with RBI adopting ‘baby steps’ approach. Confusing signals in the form of what inflation index RBI is actually tracking whether it was WPI headline or WPI Core or CPI? Dilly dallying on this front rather than adpoting a assertive stance confused participants. Participants were ahead of the curve in most cases.

So, although India is better off in terms of Real GDP Growth rate than its peers, high and persistent inflation has caused havoc. Rupees fall can be attributed to it.

Disclaimer: Currency responds to lot many factors. This article looks at one of it. Would follow up on this article highlighting other factors.

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