The Rupee's Decline and Inflation Differential Over the years, the Indian rupee has consistently depreciated against the dollar due to inflation differentials between India and other countries like the US. The theory suggests that higher domestic inflation compared to foreign counterparts leads to currency depreciation. However, India's core inflation is now lower than America's, challenging this trend.
RBI’s Role in Currency Stabilization Historically, RBI actively intervenes in Forex markets by buying or selling dollars using printed rupees. This intervention stabilizes exchange rates but also creates systemic issues such as excess liquidity leading to potential inflationary pressures.
Historical Context of Exchange Rate Policies India's post-independence economic struggles led it towards a controlled exchange rate system until liberalization reforms began in 1992. These policies were shaped by crises like famines and wars which necessitated external loans tied with strict conditions from lenders.
'Dosa Economics' Explains Depreciation Logic 'Dosa economics' illustrates how differing inflations impact purchasing power parity over time—higher local price rises relative abroad weaken currencies proportionally unless offset through interventions or productivity gains domestically improving competitiveness globally