Explained | Why is there a fall in India’s foreign exchange reserves?
The story so far: The Indian rupee hit an all-time low against the U.S. dollar this week weakening past the 77 rupees to a dollar mark and selling at 77.63 against the dollar on Thursday. So, for instance, when there is great enthusiasm among foreign investors to invest in India, it can lead to an increase in the supply of dollars in the forex market which in turn causes the rupee’s value to rise against the dollar. This means that India’s import demand amid rising global oil prices is likely to negatively affect the rupee unless foreign investors pour sufficient capital into the country to fund the deficit. So, while capital and trade flows gain a lot of attention in discussions on the rupee’s value, the difference in the rates at which the U.S. Federal Reserve and the RBI regulate the supply of their currencies may play a much larger role in determining the value of the rupee over the long run. Analysts believe that, over the long run, the rupee is likely to continue to depreciate against the dollar given the significant differences in long-run inflation between India and the U.S. At the moment, as the U.S. Federal Reserve raises rates to tackle historically high inflation in the country, other countries and emerging markets in particular will be forced to raise their own interest rates to avoid disruptive capital outflows and to protect their currencies.
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