The 75 basis point hike in the Bank rate by the US Federal Reserve last week to tame the inflation ruling at three-decade high in the US has triggered withdrawal of Foreign Portfolio Investments (FPIs) that plunged the Indian markets.
The dollar has become profitable and investors are adopting a ‘flight-to-safety’ approach. The BSE sensex alone has lost about 2575 points in the last four sessions.
A strong dollar has resulted in almost every currency including the Indian rupee dropping sharply in value against it. The rupee plunged to a new all-time low of 81.63 yesterday against the US dollar despite RBI offloading around $90 billions from its forex reserve that has fallen below $550 billion, the lowest in nearly two years.
The downtrend is likely to continue for the rupee until the inflation is controlled. Even though the rupee has weakened the least against the dollar, the fall seems unstoppable with more pressure expected in the coming weeks, as the Fed is expected to raise the rate above 4.5% from the present 3% to 3.25%.
The pressure of a strong dollar has compelled all major economies to raise their bank rates to defend their currencies and to contain the raging inflation due to worsening fuel and food crisis in the wake of Russian invasion of Ukraine.
Though domestic inflation shows signs of moderation, it’s not a consolation. Like most western economies, the RBI has too raised the repo rate by 140 basis points since April this year. But RBI needs to increase it further at least by 50 basis points to keep the inflation under check that will also provide some respite to the sliding rupee.
But every cloud has a silver lining. Despite adverse external factors, the GDP expanded 13.5% in the first quarter this year. Indian economy is set to grow at over 7% this year, the highest among all major economies in the world, despite difficult global scenario.
GST receipts of over Rs 1.40 trillion every month since April this year indicate return to growth after the pandemic. The pent-up demand is driving consumption. Service sector has seen a strong bounce back that will further go up in this festival season.
Though the bank credit offtake has been a bit slow, the retail and micro and small business have picked up considerably. Fresh corporate investments and a number of high value projects are also in the pipeline that will further boost the economic activities.
However, rising interest rates, uneven monsoon, and decelerating global growth compel us to keep our fingers crossed.