By Aditya Raghunath
Investing.com -- Today, the rupee crashed to Rs 75.15 to the dollar, the lowest it had fallen to since July 2020. It then recovered to Rs 74.8. A falling rupee affects the economy in multiple ways:
- Rupee and FIIs: FIIs (foreign institutional investors) generally sell Indian equities and bonds that make the rupee fall. In fact, multiple news reports today said that the fall of the rupee was a result of continued selling pressure in local equities and bond markets.
- Rupee and inflation: A weaker rupee means higher inflation. RBI studies have shown that a 1% fall in the rupee caused inflation to go up 0.3%. If the rupee declined by 4-5% very fast, it has a negative effect on inflation.
- Rupee and gold: A weak rupee means gold will be more expensive. That’s because India imports most of its gold. In March 2021, India imported 98.6 tons of gold, a more than sevenfold increase from 13 tons in March 2020. Today gold futures slipped only 0.03% to Rs 46,580 per 10 grams. This is after gold traded as low as Rs 44,000 earlier this month.
- Rupee and markets: In an interview with The Economic Times, analyst Sandip Sabharwal pointed out an interesting correlation between the rupee and stock markets. He said every time the rupee falls, markets generally fall along with it. If you want to understand what the markets are going to do, the rupee is a good barometer for the same.
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