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Wednesday, February 19, 2025

‘Indian Rupee could face further depreciation…’: RBI’s new challenge of a strengthening US dollar — expert advice

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The Indian Rupee (INR) is facing heightened depreciation risks as the US Dollar continues to strengthen in global markets. This trend, fueled by robust US economic data and the Federal Reserve’s hawkish stance on monetary policy, presents a fresh set of challenges for the Reserve Bank of India (RBI). With the rupee hovering near record lows, policymakers are under increasing pressure to maintain macroeconomic stability while supporting growth. The US Dollar has been on a steady upward trajectory, bolstered by sustained economic resilience in the United States. Despite global headwinds, strong consumer spending and a tight labor market have kept the Federal Reserve on a path of higher interest rates. These rate hikes have attracted global investors to US assets, leading to increased demand for the dollar. Additionally, geopolitical uncertainties and concerns about slowing growth in other major economies have heightened the dollar’s status as a safe-haven currency. For emerging markets like India, this strengthening of the dollar has amplified external vulnerabilities. The widening interest rate differential between the US and India has put pressure on the rupee, as foreign investors reassess their allocations in emerging market assets. This has triggered capital outflows, further weakening the INR. A depreciating rupee poses several risks for India. First, it increases the cost of imports, particularly crude oil, which constitutes a significant portion of India’s import bill. Higher oil prices can exacerbate inflationary pressures, making essential goods more expensive for Indian households and businesses. This inflationary impact comes at a time when the RBI is striving to keep inflation within its target range of 2-6%. Second, a weaker rupee raises the cost of servicing India’s external debt, particularly for companies with significant dollar-denominated liabilities. This could strain corporate balance sheets and weigh on profitability. Additionally, the depreciation affects Indian students studying abroad and companies relying on imported inputs, leading to a cascading effect on various sectors of the economy.

 

 

 

The Reserve Bank of India has actively intervened in the foreign exchange market to curb excessive volatility in the rupee. By selling dollars from its forex reserves, the RBI has sought to stabilize the currency. However, these interventions come at a cost. India’s forex reserves, although substantial, have declined in recent months due to these measures. A significant drawdown in reserves could undermine investor confidence and limit the RBI’s ability to respond to future shocks. In addition to interventions, the RBI has also tightened monetary policy to support the rupee. By raising the repo rate, the central bank aims to narrow the interest rate differential with the US and attract foreign capital. However, higher interest rates also increase borrowing costs domestically, potentially slowing economic growth. The RBI faces a delicate balancing act as it navigates these challenges. On one hand, allowing the rupee to depreciate too quickly could destabilize the economy, while on the other, excessive intervention in the forex market could deplete reserves and prove unsustainable in the long run. The central bank’s calibrated approach will be crucial in ensuring that the rupee’s movement remains orderly. Policymakers are also exploring structural measures to reduce India’s dependence on dollar-denominated trade. Initiatives to promote rupee-based trade settlements and attract foreign direct investment could help mitigate the impact of a strong dollar over the medium term. The rupee’s depreciation is part of a broader trend affecting several emerging market currencies. Global coordination among central banks and multilateral institutions could play a pivotal role in addressing these systemic challenges. While the RBI’s measures are vital, the strength of the dollar underscores the interconnectedness of global economies and the need for a concerted effort to ensure stability.

 

 

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Utsav
Utsav
I am creative content strategist at InfluencersPro with a flair for innovation and a deep understanding of audience engagement. Passionate about crafting impactful narratives, he specializes in turning ideas into compelling stories. His mission is to inspire and inform readers with fresh, relatable content.

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