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Rupee Exchange Rate's Impact on Interest Rates



  Aug 31, 2023

Link Between Rupee Exchange Rate and Interest Rates


Q1: What is the recent trend in the Indian rupee's value against the US dollar?

A: After a period of appreciation, the Indian rupee has recently experienced depreciation, falling below the psychological level of 83 against the US dollar.
 

Q2: What are the factors contributing to the rupee's depreciation?

A: Several factors, including a strong dollar, foreign capital outflows, rising global crude oil prices, and inflation, have contributed to the rupee's decline.
 

Q3: How does the upcoming Jackson Hole symposium relate to the rupee's movement?

A: The symposium features the US Federal Reserve Chairman, who is expected to maintain a hawkish tone. This could further strengthen the US dollar, impacting the rupee's value.
 

Q5: How does the interest rate differential between the US and India affect the rupee?

A: The widening interest rate gap makes dollar-denominated assets more attractive, leading to increased demand for dollars. This demand can lead to rupee depreciation.
 

Q6: What are the implications of a weaker rupee for an import-dependent country like India?

A: A weaker rupee can result in higher raw material and production costs for domestic companies, impacting the overall economy.
 

Q7: How does a weaker rupee impact exports?

A: While a weaker rupee might boost exports, the subdued global demand can limit the benefits for exporters.
 

Q8: How has the rupee's potential to become an international currency been discussed?

A: An RBI-appointed committee has highlighted the rupee's potential for internationalization, which could increase its presence in international trade and transactions.
 

Q9: What risks are associated with the internationalization of the rupee?

A: The increased usage of the rupee in international transactions may introduce higher volatility due to the movement of funds across currencies.
 

Q10: What measures can be taken to manage the rupee's volatility?

A: Efforts should be made to strengthen the rupee's value against the dollar steadily and manage interest rates effectively to prevent excessive volatility.
 
 
(Note: Hawkish refers to a policy stance where central banks emphasize raising interest rates to combat inflation, even if it may slow down economic growth.)


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