Rupee appreciation, interbank cheap

 The Indian rupee has been on a roller coaster ride in recent years, with its value fluctuating wildly against major currencies. In particular, the rupee's recent appreciation against the US dollar has caused a stir in financial markets and raised questions about the factors driving this trend. Additionally, the interbank lending rates have remained low, prompting investors to search for more lucrative investment opportunities. This article examines the reasons behind the rupee's appreciation and the effects of the low interbank lending rates.

Reasons behind the Rupee's Appreciation

One of the primary reasons behind the rupee's appreciation is India's improving economic fundamentals. The country has made significant strides in improving its fiscal and current account deficits in recent years, which has helped boost investor confidence in the country. The fiscal deficit, which is the difference between the government's spending and revenue, has been on a downward trend since 2014, falling from 4.5% of GDP to 3.3% in 2018. Similarly, the current account deficit, which is the difference between a country's imports and exports, has also improved significantly, falling from 4.8% of GDP in 2012-13 to 1.5% in 2017-18. These improvements have helped reduce India's external vulnerability and made the rupee a more attractive investment destination.

Another factor driving the rupee's appreciation is the US Federal Reserve's monetary policy. The US has been on a path of monetary tightening, with the Fed raising interest rates several times in the past few years. This has caused the US dollar to appreciate against many currencies, including the rupee. However, in recent months, the Fed has adopted a more cautious approach to raising interest rates, which has led to a decline in the dollar's value. This decline, coupled with India's improving economic fundamentals, has helped drive the rupee's appreciation against the dollar.

Rupee appreciation, interbank cheap

The low global oil prices have also played a role in the rupee's appreciation. India is a net importer of oil, and the low oil prices have helped reduce India's import bill, which has in turn helped improve the country's current account deficit. Additionally, the low oil prices have helped keep inflation in check, which has helped the Reserve Bank of India (RBI) maintain a stable interest rate environment.

Effects of Low Interbank Lending Rates

The low interbank lending rates in India have prompted investors to search for alternative investment opportunities. Interbank lending rates are the rates at which banks lend and borrow money from each other, and they are an important indicator of liquidity in the banking system. The interbank lending rates in India have remained low for several years, which has made it difficult for banks to generate adequate returns on their investments.

One effect of the low interbank lending rates has been an increase in lending to the corporate sector. With banks struggling to generate adequate returns on their investments, they have been forced to lend more to the corporate sector in order to maintain their profitability. This has led to a significant increase in corporate borrowing, which has helped fuel economic growth in the country. However, it has also led to concerns about the quality of the loans being made, as many of these loans may be of a higher risk profile.

Another effect of the low interbank lending rates has been an increase in foreign investment in India. With interest rates low in developed economies, foreign investors have been searching for higher yields in emerging markets such as India. This has led to a significant increase in foreign investment in India, which has helped support the rupee's appreciation. However, it has also raised concerns about the potential for capital flight if the global economic environment were to deteriorate.

Conclusion

In conclusion, the rupee's appreciation has been driven by a combination of factors, including India