As the US dollar Index felt the heat, the Indian rupee soared. But will this momentum continue?
The recent decision by the US Federal Reserve to keep the repo rate unchanged has stirred up the markets. During the post-meeting press conference, the Fed Chairperson, Jerome Powell, hinted that this may not be the end of the story. He suggested that there could be a need to raise rates later this year, with even half of the committee expecting a half-point hike.
This statement had an immediate impact on the US markets. Moreover, the US Dollar Index (DXY) took a hit. As a result, the Indian rupee saw a strengthening effect.
Now, the question on everyone’s mind is whether the Indian rupee will continue to strengthen against the US dollar.
Let’s find out.
What’s Happening?
Last week, the Indian rupee showed positive movement against the US dollar, appreciating by 0.81%. On June 12th, 2023, the exchange rate was Rs 82.55 per USD, but by June 16th, 2023, it was Rs 81.99 per USD.
The strengthening of the Indian rupee can be attributed to the decline in the US Dollar Index (DXY), which measures the value of the US dollar against major currencies like the yen, pound, Canadian dollar, Swedish krona, Swiss franc, and euro. The DXY faced downward pressure and reached close to $102 levels.
The fall in the US Dollar Index benefited the Indian rupee, strengthening against the US dollar.
Will The Indian Rupee Further Strengthen Against USD?
According to a CNBC TV18 report, Amit Pabrai of CR Forex states that the possibilities for further strengthening the Indian rupee against the US dollar are limited, and here are the reasons why.
Increasing Trade Deficit
According to CNBC TV18, India’s trade deficit increased to a five-month high of $22 billion in May 2023, meaning that the country imported more goods than it exported. This imbalance may put pressure on the Indian rupee.
Fed’s Still Hawkish Stance
As mentioned above, the US Fed kept interest rates unchanged this time. However, their comments suggested that they may still hike rates. A higher interest rate in the US makes the dollar more attractive to investors, potentially reducing the demand for other currencies, including the rupee.
Weakening Chinese Yuan
The Chinese yuan lost value due to their economic concerns. As the Indian rupee has appreciated against the Chinese currency by 2.45% in the past month, it makes imports from China even cheaper. This could either lead to savings which are suitable for the rupee, or if the import increases, the demand for foreign currencies like the US dollar will increase, putting pressure on the rupee.
Is This a Concern For RBI?
The Reserve Bank of India (RBI) doesn’t need to worry too much about imported inflation as long as the US dollar doesn’t strengthen significantly. Well, imported inflation is when the cost of goods rises in the country because of the increased costs of imported goods and services.
If the US dollar remains stable or weakens against the Indian rupee, it helps control the cost of imported goods. This means that the RBI can be more confident in managing inflationary pressures arising from imports.
But, there are several other factors which influence exchange rates. So, what’s going to happen next is still difficult to predict. All we can do is wait and watch.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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