Rupee to Find Hope as RBI Increases Interest Rates to Contain Inflation

Published Date : Sep 11, 2018

The Indian rupee plunged to a new low on Monday as it hit 72.67 against the greenback, falling back from the earlier closing mark by 94 paise. Some report say that it reached a life-low of 72.45 due to the escalation of a global trade war and rising concerns of contagion from a developing-market rout. The Indian rupee is said to have faced the brunt of capital outflows, surging crude oil prices creating panic among importers, and the strong demand for the U.S. dollar.

However, the Indian rupee is analyzed to not go in for free-fall as the RBI is expected to control inflation by appropriately increasing interest rates, says Raghuram Rajan, former governor of the central bank.

RBI Increased Key Lending Rate Twice amid Inflationary Concerns

Rajan said that the RBI finds it important to assure investors that inflation will ultimately be kept under control. However, he remained non-committal on the suggestion of using NRI bonds to check the depreciation of the Indian rupee against the American currency, but addressed them as weapons in the armory. According to a report, the Indian currency has held fort against most currencies despite is weakening rate. In fact, it is said to have appreciated against several currencies if the five-year exchange rate is compared. Nevertheless, one cannot turn a blind eye to the appreciation of the greenback against heavyweight currencies.

Although the India rupee may have appreciated against most currencies, its weakening rate could reflect severely on the country trade business. In the meantime, India has tasked the RBI to check inflation at 4% with a +/- 2% margin.