Economists believe that the Indian Rupee (INR) might appreciate marginally against the U.S. Dollar next year. In a recent report authored by Motilal Oswal, the country anticipates an annual trade surplus for the first time after seventeen years in the fiscal year 2021-22. The export level exceeded imports due to contraction in domestic spending.
The reduced crude oil prices and cost of other non-oil utilities amid the COVID-19 outbreak might have contributed to the current account surplus. However, the trade surplus is not likely to last more than a few months once the country’s GDP rate is improved.
Experts argue that India’s current account surplus could turn into a trade deficit, recording a decrease of 1.1% in the GDP next year. Despite the Reserve Bank of India’s (RBI) intervention, the INR depreciated by 3.1% in 2020. The Motilal Oswal study also shows that the domestic currency price movement has a strong linkage with the country’s forex reserves, instead of the current account balance.
While the INR tested a hard time in 2020, It might strengthen to an average of 73.5 against the U.S. Dollar (USD) in the fiscal year 20-23, as compared to 74.4 in the financial year 2021-22.
Analysts predict the strengthening of the Indian Rupee amid the movement of the country’s current account balance back to the deficit in the fiscal year 2022-23. The Indian government doesn’t seem to hold back from the accumulation of the forex reserves in the coming year. Therefore, if things went in line as perceived, the INR might continue to strengthen against the USD. You may take advantage by trading Forex with a reliable brokers, learn more here.
Reasons for Inflationary Pressure on the National Currency
Every new generation seems to be complaining about the rising prices, and it’s natural. Whether it’s a rupee or the U.S. Dollar, the value of currencies tends to decline over time. Essentially, you can’t buy the products for the same amount of money as used to be ten years ago. Prices tend to rise when the market falls short of products and services, as compared to the excess supply of money.
Similarly, if a Central Bank of India introduces more cash flow into the economy and the current economic growth rate of the country stays the same, the difference will trigger inflationary pressure on the domestic currency. Resultantly, the purchasing power of the Indian Rupee will decrease, and the prices of commodities will rise.
On the other hand, fixed interest rates help to ease up the loan repayments. Because the country might be paying the same amount with a decreased worth.
Inflation also hurts consumer spending, which might ultimately raise concern for industries. The cost of import increases while exporters enjoy more earnings.
Conversely, if the increased supply of cash flow is coupled with slower economic growth, the country’s economy might face deflation. Whenever a country’s economy observes a deflationary state, the purchasing power of domestic currency strengthens.
Both inflation and deflation in the economy doesn’t hold much relief for consumers. Unless India improves production activity within the country, people will continue to suffer. Although, investment in fixed-income securities might yield more returns in times of deflation. But a repayable loan that carries a fixed interest rate is likely to have a higher value than before.