Discover that inflation and interest rates are quietly shaping the future of the rupee.
The value of the Indian rupee (£) is influenced by several factors, and the most important is two factors: interest rate and inflation. Let’s explore how these factors affect the rupee and why the rupee depreciates due to these factors. It also explains how US rate cuts will affect the rupee.
Interest rates and rupee
Interest rates set by the Reserve Bank of India (RBI) play an important role in determining the appeal of Indian investments to foreign investors.
Higher interest rates: When RBI raises interest rates, it increases the return on investment in India, such as bonds and savings. This will make Indian assets more attractive to foreign investors, increasing demand for the rupee and strengthening its value.
Low interest rates: On the other hand, if RBI lowers interest rates, foreign investors can seek better returns elsewhere. As a result, demand for rupee will decrease and weaken it.
Inflation and rupee
Inflation refers to the rise in prices of goods and services over time. If India’s inflation is higher than in other countries, the rupee will be weaker.
Why does this happen? The higher the inflation rate, the more the purchasing power of the rupee is compromised and the less value it becomes. As a result, foreign investors are less likely to invest in Indian assets, leading to a decrease in demand for the rupee and depreciation of its value.
US rate reduction and impact on rupee
a Rate reduction The US Federal Reserve could also affect Indian rupee.
When the US cuts interest rates, it reduces US return on investment and makes other markets like India more attractive. This could potentially lead to an inflow of dollars into India, increasing demand for the rupee and strengthening it.
However, if India cuts interest rates or faces higher inflation, the rupee could still depreciate even if the US cuts interest rates.
Conclusion
The value of the rupee depends on a mix of national factors such as interest rates and inflation and global conditions. A strong rupee requires a careful balance of these factors. While US fee cuts can help support the rupee, India’s own economic policy is important in determining its long-term strength.
