Indian rupee hits record low; worries over inflation rise

Lower forex reserves pose concerns for the country's current account deficit



By Web Desk

Published: Wed 20 Jul 2022, 8:08 AM

Last updated: Wed 20 Jul 2022, 8:27 AM

The Indian rupee fell to more than 80 per US dollar for the first time on record on Tuesday, raising concerns about imported inflation.

The rupee hit 80.0600 against the US dollar in early trade, Bloomberg data showed, before paring losses on suspected central bank intervention to close at 79.9487.

Tighter US monetary policy has exacerbated outflows from emerging markets such as India, where foreign investors have withdrawn a net $31 billion in debt and equity this year.

In a written statement to the Indian parliament on Monday, finance minister Nirmala Sitharaman attributed the rupee's sharp fall to external reasons.

"Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian Rupee against the US dollar," she said.

At the same time, the Indian currency has strengthened against the British pound, the Japanese yen and the euro in 2022 so far, Sitharaman added, according to AFP.

In a Twitter post last week, Sanjeev Sanyal, Member, Economic Advisory Council to the Prime Minister, had said, “The RBI is using reserves to smoothen move but correctly allowing market adjustment… the only real cause for concern is imported inflation from energy prices. Given oil import dependence, there is little India can do about this in short term beyond some domestic adjustments (say cutting taxes at the margin) but all such measures have a price.”

“We do see some more pain for the domestic currency in the near term, but it is likely to remain cushioned by the 81-mark amid a host of factors. For one, the strength in the dollar index seems unsustainable at higher levels, with expectations that the European Central Bank and other developed market central banks will also hike interest rates aggressively,” said Sugandha Sachdeva, Vice President, Religare Broking Ltd, according to The Indian Express.

Almost three-fourths of India's inflationary pressure comes from imported inflation. The lower forex reserves pose concerns for the country's current account deficit.

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