By Linus Garg
First publised on 2022-05-10 03:26:44
The US dollar, already gaining strength after the 50 basis point rate hike by the US Fed last week, raced ahead on Monday to weaken most currencies. The Indian rupee breached Rs 77/$ for the first time and touched Rs 77.53. The RBI is unlikely to use its reserves to shore up the currency. The expected huge inflow of foreign funds in the LIC IPO also did not materialize as FIIs showed muted interest in the issue and that further weakened the rupee.
Although a weakening rupee makes it better for exporters who get more for every dollar and makes it attractive for FIIs to invest in India (they were withdrawing huge amounts from the capital markets after the rate hike by the Fed) while at the same time making it costlier for them to withdraw funds, on the flip side it makes imports costlier, especially crude imports and that will add to overall inflation.
As the RBI had targeted inflation and recently raised interest rates in an off-cycle meeting, a weak rupee adds to its worries as costlier imports of crude and commodities will definitely add to inflationary pressures in the short term. Most experts feel that with $600bn in forex reserves, India is comfortably placed and the RBI can intervene if the situation goes out of hand.
But if the situation persists and the rupee slides further, India's import bill will balloon. Further, if most commodities and inputs become costlier, domestic companies will raise prices of products leading to inflationary pressure. If the rupee does not stabilize in a couple of days and if the fall continues unabated, the RBI will have to intervene without worrying much about the drain on reserves as runaway inflation will be a bigger worry than a dip in forex reserves.