What a skyrocketing dollar value means for India
India’s inflation concerns will increase as the cost of imports increases due to a stronger dollar.
The Rupee hit a fresh intraday low at 78.28 and finished below the 78 level for the first time. activity as the US inflation rate soared to record highs of 8.6% in May, the highest level since December 1981.
This will increase the movement of capital out of emerging economies and put pressure on the local currency, increasing the price of imports.
Why is the value of the US dollar soaring?
The US Dollar Index, which measures the value of the dollar against six major global currencies, recently surpassed its 20-year high and is now trading above 105. The year started at 96. The US Dollar Index dollar rose as a result of three macroeconomic changes.
First, high energy and food prices pushed U.S. consumer price inflation, which had been slowly rising since October 2021, to 8.6% in May 2022, its highest level since December 1981. An economy’s interest rates generally catch up when inflation rises. The country’s bonds thus become more attractive, which increases the demand for the currency. In one year, the yield on a 10-year US government bond doubled, from 1.4% to 2.8%.
Second, the US Federal Reserve has shifted into high gear to fight inflation with rate hikes in recent months after denying how rigid it was until early 2022. The Fed raised its key rates by 150 basis points since March. Market watchers expect it to implement a second 75 basis point hike in July.
Third, the flood of cheap global money from these countries that has propelled all risky assets from cryptocurrency to junk bonds to equities in private and public markets has abruptly started to recede as banks Western centrals turned off the easy money taps and raised rates. .
Effect on Indian economy
Effect on the Indian stock market – The dollar weakens and the INR strengthens if the index falls and vice versa. As a result, international investors in India have the opportunity to earn greater returns on their investments, but for now, the scenario is opposite. The Indian stock market could deepen and turn bearish.
Foreign Investment – With a rising dollar index, foreign investors find India a precarious investment avenue to earn higher returns on their investments. As such, REITs/FIIs flooding into the Indian economy and contributing to economic growth may suffer. The flow of capital to companies from their international joint venture partners is increasing as REITs and FIIs shrink. This can affect business growth and expansion.
Changes in metal prices – Historically, gold prices have been observed to move inversely to the price of the dollar. So, if the dollar index rises and the dollar appreciates, the price of gold would fall and vice versa. This movement in gold prices impacts the demand and supply of gold and as such the Indian economy.
Fuel Prices – Commodities for fuel and oil are traded in dollars. Since it imports more crude oil than any other country, the Indian economy is impacted by changes in the dollar index. Crude oil and other commodities cost more when the dollar index rises. As a result, import prices are rising and India’s current account is in deficit. Moreover, it impacts oil refineries, oil importers and the bottom line of oil companies. If the dollar index goes down. This is very evident as we speak.
Inflation – Indian inflation trend is also influenced by the dollar index. A rise in the dollar index strengthens the dollar and lowers the value of the rupee. A weaker rupee increases the price of imports and reduces the profitability of India Inc. by increasing the cost of production. Cost increases cause inflation, which raises the prices of products and services to the detriment of customers. Consequently, when the dollar appreciates, the entire GDP (Gross Domestic Product) is affected and slows down.
What is the short-term outlook for the US dollar and the Indian rupee?
Fears of a further escalation in inflation and making it difficult to fight rising prices have been heightened by global geopolitical uncertainty caused by a long Russian-Ukrainian conflict.
A rise in interest rates and a high level of global borrowing could trigger a recession. Although it may ease slightly, inflation is not about to disappear, as the Economic Times indicates.
Quoting from the aforementioned report, while according to bankers, imports will always be more expensive as invoicing is done in dollars and the majority of importers lack bargaining power, even though the currency of India’s trading partner has fallen with the rupee.
Therefore, most forecasts predict that the rupiah will continue to lose ground against the dollar in the coming months, reaching 80 or even 81 levels due to the ongoing Russian-Ukrainian crisis, rising oil prices and the absence of any sign of appeasement from the Extractions FPI. However, if a conflict ends, oil prices fall, or REITs start to unexpectedly see the value of Indian equities at lower levels, these expectations could change drastically very quickly.