The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year, in response to various domestic and global factors. Specifically, a widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors have all put pressure on the rupee’.
Safe-haven demand
It must be noted that the dollar has strengthened against all currencies, developed or emerging. The runaway inflation levels since last year, which have seen consumer price index (CPI) inflation in the United States reaching a multi-decade high of 9.1% in June 2022, have prompted the reversal in the monetary policy stance of the US Federal Reserve. With inflation rising unabated, the Fed is widely expected to continue raising interest rates. Unsurprisingly, the rate hiking cycle by the US Federal Reserve has precipitated the dollar’s appreciation which has led the dollar index to strengthen by over 11% in 2022 so far, taking it to a 20-year high.
