News Highlight
The Indian rupee on Thursday weakened sharply against the US dollar to a new record low of 80.79.
Key Takeaway
- It was because the Federal Reserve (the United States of America’s central banking system) increased interest rates by 75 basis points and signalled more steep increases in the future.
- The rupee depreciated by 83 paise to close at 80.79, suffering its biggest single-day fall since February.
The Federal Reserve interest hike and the effects on the Indian Economy.
- Depreciate the value of the Indian Rupee:
- The value of a currency is determined by the basic economic concept of demand and supply.
- If Indians demand more dollars than Americans demand the rupee, the exchange rate will fall for the rupee and strengthen the dollar.
- An interest rate hike in the US increases the relative returns on dollar investments, strengthening the US currency.
- Capital outflow:
- The aggressive rate hike by the Federal Reserve will put further pressure on the stock markets.
- When the interest rate is increased in the US, the investors pull assets away from the emerging markets. Due to high-interest rates, capital flows more toward the American economy.
- Force the central bank to hike interest rates:
- Higher interest rates in the U.S. will force major central banks, including India, to increase interest rates to stem the pressure on their domestic currencies.
- Higher interest rates make loans more expensive for both businesses and consumers.
- Costlier imports:
- India is one of the largest crude oil importers in the world.
- A weaker rupee results in more expensive imports of crude oil that may put a cost-driven inflationary push across the whole economy and especially in those sectors that are highly sensitive to crude oil price movements.
- Widen in the current account deficit:
- A weak rupee will make imports costlier, further widening the current account deficit. The trade deficit may widen further.
- The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
- India’s export:
- India’s exports, on the other hand, notably IT and IT-enabled services – will benefit to some extent from a stronger dollar concerning the rupee.
Why did the US Fed increase interest rates?
- Globally economies are in a recession due to high inflationary pressure. To combat this, the Federal reserve, which is the central bank of the US, is taking aggressive steps such as an increase in interest rates to reduce the money supply flow in the economy.
Content Source: The Hindu