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Side effects of Rupee rally
Thu, 13 Mar Pre-Open

The Rupee has logged the smartest gain among major emerging market currencies since touching a life-time low in late August last year. The Rupee has been largely resilient, following its drastic depreciation last year. A slew of measures by the Reserve bank of India and steps to contain current account deficit by the government have helped check the slide.

This is good news for importers, who import petroleum and edible oil, and for those looking to travel overseas. But a stronger Rupee means that those who depend on remittances from relatives abroad will get fewer rupees for every dollar. Similarly, exporters will see a dip in realization.

The Rupee rally was also due to global factors. On the global front, the Rupee has benefitted from the country being in a relatively better off position with respect to other emerging market currencies. Currencies of countries such as Russia have fallen over 10% on the back of geo political unrest and on the back of weakening economy. The Chinese economy has slowed down and could be heading for a soft landing.

While there is a basis to this optimism, there is also room for caution. It is by no means certain that the election will throw up a decisive verdict. The challenges posed by the external environment, highlighted by the crisis in Ukraine, are far from over. The US Fed could hasten the process of QE withdrawal which could put pressure on the Rupee. The looming threat from El Nino-induced weather aberrations raises fears of a fresh spike in global oil and agri-commodity prices, just when inflationary pressures are easing. All the above factors could lead to macroeconomic instability which could result in the Rupee becoming volatile.

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