The Indian Rupee depreciated against the US Dollar on Friday. The USD/INR currency pair soared to life-high levels at 78.20 on Friday on rising inflation.
The US Dollar to Indian Rupee has been surging higher consistently for almost six months. It is trading at life-highs at 78.16 with high inflation, increasing crude prices, and heavy FII outflows.
In January 2022, the USD/INR was trading at 73.74, but by June 2022, the currency pair has gone up almost 6.04% in 2022. The Dollar to Indian Rupee closed at 78.116 on Friday, June 10, 2022.
Indian Rupee Hit by High Inflation
Table of Contents
The Reserve Bank of India raised the benchmark rate by 50 bp. The repo rate, the rate at which banks borrow from the RBI, has gone up by 50 basis points. During the pandemic, the RBI brought down rates by 75 basis points as lockdown restrictions curbed economic activities. The Reserve Bank of India has hiked interest rates to curb inflation after the pandemic as commodity prices are high and affect household expenses.
Persistent inflation is delaying economic recovery in the country. The Consumer Price Index (CPI) at 7.8% in April is an 8-year high.
The Indian Rupee has weakened with high inflation hitting the economy. Food prices are high and retail inflation was at 7.79% in April and 7.1% in May. The retail inflation rate has come down relatively but still impacts the economy. Import costs are increasing as the Indian Rupee weakens.
The Reserve Bank of India raised interest rates to curb rising inflation. Edible oil costs affect ordinary households as India depends on imports for the supply of edible oil. Food prices have surged higher with a rise in the prices of tomatoes and potatoes. Wheat prices have gone up with the Ukraine war bringing a shortage in wheat supply.
Developed countries like the US and the UK are affected by rising inflation. Inflation in the US is at a 4-decade high.
The unemployment rate in India is at 7.83% in April, according to the Centre for Monitoring Indian Economy. Unemployment is high in states like Rajasthan and Haryana. But, the employment rate has improved from 36.46% to 37.05% in April. Unemployment problems are more pronounced in urban areas than in rural areas.
Despite high inflation, the growth target in the country is 7.2%.
High Crude Prices Hinder Economic Growth in India
Crude prices are soaring higher, which is keeping the Indian Rupee lower. There is a massive sell-off in equity markets amid high inflation and rising crude prices. Investor sentiment is negative on economic growth as soaring prices weaken the Rupee.
The Russia-Ukraine conflict has hit the Indian economy. The Indian Rupee is the worst-performing currency in Asia in 2022. Analysts fear that the USD to Rupee may decline to 80 levels.
Crude prices are trading at 120 Dollars per barrel. If the situation in Ukraine continues, experts fear that the crude prices may reach 150 per barrel. However, if the government reduces excise duty on crude imports, petrol and diesel prices may drop in India. India imports almost 85% of crude oil, which keeps inflation higher. India is also a leading importer of edible oil. Edible oil prices are soaring higher, leading to an increase in food prices.
Indian Rupee Weakens with High FII Outflows
FII outflows from India are high in 2022. Investors are wary about the high outflow of foreign capital. The FIIs have pulled out money from the country this year. In the last eight months, the FII has taken more than three lakh crore Indian Rupees from the markets.
The FII outflow may be due to the high-interest rates across the globe, say analysts. The Dollar index is rising higher, while the Indian Rupee has weakened. It is another factor that triggers the FPI outflow, say analysts.
Surging US Dollar Index Weakens Rupee
USD/INR is on an upward trajectory as the Dollar gains strength. The value of the Indian Rupee depreciates as the US Dollar rallies higher to 104.15, which is a three-week high.
High inflation in the US is driving the greenback higher. The FOMC policy statement next week will play a decisive role in the forex market. The energy crisis is a major cause of the soaring inflation in the US.
The US Dollar index outperforms other currencies. It is trading at multi-month highs, a surge upwards from 89.65, the levels at which it was trading in June 2021.
Major Currency Pair Price Predictions
The Dollar Index is at strong resistance levels at 104.15. If the greenback strengthens, it may hit the recent high levels at 104.89.
The EUR/USD is trading below the 21 DMA at 1.0639. The Euro to Dollar has to move past this level to gain strength. It has strong support at the 1.0491 levels.
The GBP/USD is trading at a 3-week low. It has strong support at the 1.2250 level. A move above 1.2580 will keep the British Pound to Dollar currency pair on an upward trajectory.