Rupee falls below 80 against dollar, raises worries over imported inflation

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Rupee falls below 80 against dollar, raises worries over imported inflation

  • Rupee breached 80 level versus dollar for the first time as crude oil prices rose in the international market.

Why are Dollars & rubles winners of Ukraine war?

  • Value of the rouble increased: Russia demanded to be paid in its own currency instead of euros or dollars, to sidestep western sanctions.
  • Dollar gained: Europe was forced to shop for oil markets that demanded US currency.
  • To fight domestic inflation US Fed’s higher interest rates triggered mass departure of investments to America.
    • It increased the value of dollar further.

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Effect on rich world’s currencies

  • In July, Japanese yen hit a 24-year low and euro fell to its lowest point in the past 20 years.
  • Indian rupee grew stronger against many rich world currencies.
  • Depreciated against Chinese yuan, Brazilian Real and rouble.
  • US dollar appreciated against all currencies
  • It is the currency in which most international transactions are done
  • Bulk of foreign reserves maintained by most currencies.
  • IMF’s estimate: US dollar constitutes about 55% of global forex reserves.

What is being done by RBI?

  • It liberalised norms to boost inflows of foreign exchange
  • Doubling borrowing limit under External Commercial Borrowing (ECB) route.

Way ahead

  • RBI should focus on containing inflation
  • Government should contain its borrowings.
  • Higher borrowings by government eat up domestic savings and force rest of the economic agents to borrow from abroad.

Prelims Take Away

  • ECB
  • RBI
  • IMF
  • Inflation
  • Depreciation