Rising dollar, falling rupee

November 21, 2016 02:01 am | Updated November 17, 2021 06:27 am IST

Donald Trump’s surprise win in the U.S. presidential elections has lent the dollar new wings. It has soared against most currencies, including the rupee, on the expectation that his economic policies will spur growth and inflation in the world’s largest economy. The prospect of the Federal Reserve raising interest rates provided an updraught that helped the dollar extend a record appreciating streak against the euro last week and pushed the rupee past 68 to a dollar. In Congressional testimony last week, Fed Chair Janet Yellen signalled that the central bank was close to a decision to raise rates again. Some economists predict U.S. GDP growth could see appreciable acceleration in 2017 — with one projection positing even a doubling of the pace by the fourth quarter — if the new administration delivers on some of its promises, including tax cuts, deregulation and infrastructure spending. In fact, with a Republican majority in both the House of Representatives and the Senate, Mr. Trump could benefit from smoother Congressional backing for policy initiatives to boost economic activity. U.S. stocks and bonds have also reflected the optimism over the outlook for U.S. growth and prospects that increased fiscal spending will help reflate the economy, with the S&P 500 Index adding gains for the second straight week and benchmark bond yields climbing in anticipation of faster inflation.

For the rupee, which has slumped 2.3 per cent from its 66.62 a dollar close on November 8, the flight of capital from emerging market assets has inflicted significant pressure that has been exacerbated by the Centre’s decision to withdraw higher denomination currencies. Foreign institutional investors have sold more than $2.5 billion of Indian equity and debt holdings so far this month, compared with the about $1.5 billion they offloaded through October. With the demonetisation move infusing a surge of liquidity into the banking system, domestic interest rates are expected to decline, making the rupee less attractive to investors seeking to benefit from an interest rate arbitrage. And with consumption and broader economic activity predicted to take a hit on account of the shortage of cash in the wake of the currency move, GDP growth may slow sharply. That in turn could weaken overseas investor appetite for rupee assets. The task before policymakers, and the monetary policy committee that is set to meet on December 7, a week before the Federal Open Market Committee’s rate decision, will be to reassure markets and investors that India’s economy remains robust.

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