Much of Rupee's weakness linked to strong US dollar index: SBI Research
New Delhi, September 25: Much of the weakness in the rupee is due to a strong US dollar index and not just because of India's domestic economic fundamentals, SBI Research stated in its latest report.
The rupee has been rapidly depreciating, reaching yet another lifetime low on Friday morning as the US dollar index rose to a two-decade high this week. On Friday, the rupee opened 25 paise lower than the previous session, reaching a new low of 81.09 against the US dollar, compared to Thursday's closing of 80.86. Notably, Thursday's fall was the rupee's biggest one-day drop since February 24.
"The Indian rupee (INR) depreciated by a modest 7 per cent vis-a-vis the US dollar since the war broke out. The US dollar Index has appreciated by 15 per cent during the same period," SBI Research added.
There have been times in the past when the rupee depreciation was far more than the dollar appreciation, which occurred due to weak domestic macroeconomic fundamentals, it noted.
The rupee has recently stayed below 80 per dollar as the RBI seems to have protected it from crossing the psychological benchmark of 80 per dollar while also keeping its volatility under control.
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"However, after the recent Fed rate hike by another 75 bps and dot plot indicating the possibility of the terminal rate of around 5 per cent, the rupee has depreciated crossing the 80 per dollar mark," the report added.
According to the report, the repo rate should rise to 5.8-6.0 percent if the government aims for a fiscal deficit of 4.5 percent of GDP.
"Another important result of our study is that the key rate of interest set by the RBI is not much affected by the fiscal deficit target. This is because in the case of India the key terminal rate depends more on inflation and the liquidity situation in the country," it further said.
A budget deficit indirectly affects interest rates by influencing inflation and liquidity dynamics.
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-PTC News
