- Indian Rupee weakens against US Dollar following announcement of India’s Fiscal Budget 2024-25.
- Indian government increases capital gains taxes with immediate effect.
- This week, the US Dollar will be influenced by a series of US economic data.
The Indian Rupee weakened to around 83.70 against the US Dollar (USD) in the European session on Tuesday. The Indian currency is facing pressure due to a sharp sell-off in equity markets following the announcement of the Fiscal Budget 2024-25.
India’s Finance Minister Nirmala Sitharaman has proposed to increase taxes on Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) with immediate effect. The Centre has increased taxes on LTCG and STCG from 10% to 12.5% and 15% to 20% respectively. While the exemption limit on LTCG has been raised to Rs. 1.25 lakhs from Rs. 1 lakh.
Higher taxes on capital gains are an unfavourable scenario for foreign investors who are interested in investing in India through direct investment or institutional routes. This could have a negative impact on the Indian rupee in the short term.
However, the long-term attractiveness of the Indian Rupee could strengthen as the administration has lowered the fiscal deficit targets for 2024-25 and 2025-26 to 4.9% and 4.5%, respectively.
Meanwhile, the US Dollar is performing subdued with the focus on a slew of US economic data due out this week. The Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, is trading around 104.30.
The main trigger for the US dollar will be the core personal consumption expenditure (PCE) price index for June. Core PCE inflation is a preferred inflation tool of the Federal Reserve (Fed), which provides clues as to when the central bank will start cutting interest rates. Currently, financial markets expect the Fed to start cutting interest rates as early as the September meeting.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of crude oil (the country relies heavily on imported oil), the value of the US Dollar (most trade is done in US Dollars) and the level of foreign investment are all influential factors. Direct intervention by the Reserve Bank of India (RBI) in the foreign exchange markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are other important factors that influence the Rupee.
The Reserve Bank of India (RBI) actively intervenes in the foreign exchange markets to maintain a stable exchange rate and help facilitate trade. In addition, the RBI attempts to keep the inflation rate at its target of 4% by adjusting interest rates. Higher interest rates typically strengthen the Rupee. This is due to the role of the “carry trade,” where investors borrow from countries with lower interest rates to place their money in countries offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, economic growth rate (GDP), trade balance, and foreign investment inflows. A higher growth rate can lead to higher overseas investment, increasing demand for the Rupee. A less negative trade balance will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates minus inflation) are also positive for the Rupee. A risk-off environment can lead to higher foreign direct and indirect investment (FDI and FII) inflows, which also benefit the Rupee.
Higher inflation, particularly if it is comparatively higher than other countries, is generally negative for the currency as it reflects a devaluation through excess supply. Inflation also increases the cost of exports, leading to more rupees being sold to buy foreign imports, which is negative for the Indian Rupee. At the same time, higher inflation usually leads the Reserve Bank of India (RBI) to raise interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect applies to lower inflation.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
