India is trying to “address volatility” in the rupee that has plunged to record lows against the dollar in recent weeks, a government official said on Monday.
This tumble comes in the wake of concerns regarding trade deficit and sell-off assets by foreign investors.
The rupee has fallen 6% against the dollar in 2022, weighed down as investors retreat from domestic market shares.
A variety of factors can cause the volatile nature of the Indian Rupee. The value of INR is significantly affected by crude oil prices as India imports a large quantity of it. An increase in oil prices causes the value of the Indian currency to drop.
Meanwhile, the trade deficit that India faces touched a monthly record of $24.3 billion in May, impaired by higher prices of goods.
“When oil prices are this high, obviously CAD (current account deficit) will go up. Last several years India has been bridging CAD with capital flows. This year there are headwinds on capital flows,” an official told reporters.
The official, however, said that macroeconomic fundamentals remained strong and he was “fairly confident” that India would come out strong when the situation improved.
The official also said the government would adhere to the fiscal deficit target of 6.4% of GDP for the 2022/23 financial year that began on April 1.
“The Indian rupee is reeling under pressure on the back of a rise in the dollar index towards a multi-decade peak, incessant portfolio outflows, soaring crude oil prices, and a rising interest rate regime. Besides, the rise in crude prices is leading to a lot of concerns about widening CAD, which is weighing on the rupee-dollar exchange rate,” said Sugandha Sachdeva, Vice President—Commodity and Currency Research, Religare Broking.
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