Rupee Strengthens on RBI Interest Rate Hike

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The rupee has strengthened against the USD due to the news that the Reserve Bank of India has raised its rap interest rate to a higher than expected level of 4.9 per cent against the expected 4.8 per cent and the previous 4.4 per cent.

Inflation in the world’s third-largest economy soared to 7.9 percent in April, well above the 4 percent target set by India’s policymakers.

RBI’s sharp move is timely as the currencies of newly industrialized countries like India face major currencies like the USD and GBP. These currencies strengthened after consecutive months of monetary tightening, putting the INR at a disadvantage.

What does this mean for India’s economy? In terms of currency exchange and trade, the INR is on the weaker side of exchange rates. On top of that, this is making India’s domestic goods and services competitive. On the downside, there are more capital outflows as businesses and individuals exchange their Rupees and keep their savings in foreign currencies like the USD to protect against the weakness of the INR. In addition, imported goods such as fuel and consumables are less affordable. Traveling abroad and buying foreign goods is more difficult when the domestic currency is weaker than other currencies.

Will the RBI raise interest rates? Probably, at least soon. The outlook for India’s economy is relatively optimistic, with Governor Shaktikanta Das forecasting a growth rate of 7.2 per cent for the 2021-2022 full year. For the Rupee to regain further strength against the USD, economic growth should stay on track as expected and the RBI may decide to raise its rap rate again soon.

Most economies, including India, are struggling with inflation caused by high oil prices pressed up by the conflict in Ukraine. India’s dependence on foreign fuel imports weighs heavily on the economy and at the time of writing, spot oil prices are still well above $ 100 per barrel.

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Quick Tip

What is the INR?

The INR is the currency of the Indian rupee, the national currency of India. Classified as a newly industrialized economy, India’s free-floating currency is supported by GDP growth of around 7 percent per year.

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