Rupee weakness puts upward pressure on interest rates

Interest rate in India is rising on the back of the steep decline in the value of rupee against the dollar in recent months.

Experts feel that the depreciating rupee raises domestic interest rate through three ways. First, in order to discourage speculation in the currency market, Reserve Bank of India (RBI) tightens liquidity and raises short term interest rates. Following the RBI’s liquidity tightening steps, several banks raised lending rates.

Second, the depreciating rupee raises the import price of crude oil and this drives up domestic inflation thereby prompting RBI to maintain policy rates at high level. Third, expensive dollars will make business unviable and increase bad loans thus hurting interest income of banks.

Recently, rupee declined to a new historic low of 65.56 per dollar.

The Indian currency is depreciating against dollar because global investors are pulling out funds from emerging markets, including India anticipating tapering of monetary stimulus by the US Federal Reserve.

Investors believe that the US central bank was inclined to gradually reduce its monetary stimulus of $65 billion a month.