Inflation increases the price of goods and services over time, effectively decreasing the number of goods and services you can buy with a dollar in the future as opposed to a dollar today. This effectively decreases the time value of money, since it will cost twice as much to purchase the same product in the future.

The level of inflation has a direct impact on the exchange rate between two currencies on several levels: The currency with the higher inflation rate then loses value and depreciates, while the currency with the lower inflation rate appreciates on the Forex market.

The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens. Of late, the RBI has been buying dollars from the market to shore up the forex reserves. When the RBI mops up dollars, it releases an equal amount in rupees.

The study talks of an export elasticity of 0.7 to 0.9—that is, a one per cent appreciation of the rupee reduces export growth by 0.7-0.9 per cent—and, more important, says that “going forward, large capital inflows unless fully absorbed through current account deficit and/or mopped up as foreign exchange reserves can …

The record inflow of dollars through Foreign Portfolio Inflows (FPI) and other modes have increased the demand for the rupee. This has led to rupee appreciating against the dollar. Thus, our view is that RBI may not further buy dollars from the markets until the time uncertainty looms around its inflation target.

For instance, due to heavy imports, the supply of the rupee may go up and its value fall. In contrast, when exports increase and dollar inflows are high, the rupee strengthens. Earlier, most countries had fixed exchange rates.

Current account deficit The Euro Zone has been historically one of India’s major trading partners. The rising current account deficit has depleted our foreign exchange reserve and thus led to a fall in the value of the Indian Rupee.

“Overall, we would not expect the rupee to appreciate much further, as capital flows are likely to decline in the coming months, especially if the fall in Covid-19 cases is slow and weighs on economic recovery. Our projections for the USD/INR rate are INR74. 5 in three months, INR75.

So far in the year 2020, the Indian rupee suffered great volatility and seesawed between 76.90 and 70.75 levels against the US dollar. Until the global economy is capable of recovering at a rapid pace once COVID-19 is defeated, the upside risk to the USD-INR spot will remain intact.

It means that while the euro is appreciating against the US dollar, the Indian Rupee is depreciating against the US dollar. The resulting Eur to INR cross will see the euro trade at its strongest levels against the rupee.

The Indian Rupee is expected to trade at 74.91 by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 75.84 in 12 months time.

Pakistani rupee has emerged as the world’s best performing currency as it appreciated the most against the US dollar in the past three months ended March 31, 2021. The rupee strengthened in the wake of excessive inflow of foreign currency from global sources compared to a limited outflow during the Covid-19 pandemic.

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