Dropping Rupee raises concerns over imported inflation

The rupee fell below the psychological level of 80 to 80.05 against the US dollar intra-day amid tightening monetary conditions and risk-off sentiments as well as persistent outflows from domestic markets, raising concerns over high imported inflation.

Capital outflows and the RBI’s defensive action to protect rupee from a sharp slide against the dollar have resulted in lower forex reserves, posing concerns for the country’s current account deficit in this fiscal.

The rupee traded neutral to range-bound between 79.85-80.05 and closed at 79.95 as the dollar index stayed in muted trading sessions. While, currencies such as the British pound, the Japanese yen and the euro have weakened more than the Indian rupee against the US dollar, strengthening the Indian Rupee against these currencies in 2022.

Foreign portfolio investors (FPIs) have pulled out Rs 2.37 lakh crore since January this year and forex reserves have dwindled by $62 billion from the September 2021 peak of $ 642.4 billion.

The Consumer Price Index or CPI-based inflation has been over 6 percent for two straight quarters, remaining above the upper limit of the RBI’s medium-term target range of 2-6 percent. Most of the risks to inflation are seen emerging from the crisis in the aftermath of the Ukraine-Russia war.

Union Finance Minister Nirmala Sitharaman said, “Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the US dollar.”