Probably, INDIA''s demand for $ is now high due to less capital inflows which is likely to increase demand for dollar denominated loans further with government initiatives which again means stronger dollar...
INDIA demand for dollars has not gone up, but due to unfavourable oil prices and inflation and expectations and strong dollar due to safe heaven image during trade wars and uncertainty and tightening in the US...
But, inflation breeds inflation and depreciation more depreciation which is the main cause of outflows from debt and equity and when $s outflow it increases inflation and depreciation, in this situation more demand for dollars would make it stronger...
However, INDIA has not any BoP crisis due to higher $ demand, but low supply due to outflows which has increased depreciation coupled with higher oil prices...
Oil prices are an important trigger for inflation and inflation expectations and depreciation and expectations and interest rate hike and expectations and strong dollar too...
The direct intervention in the exchange market to sell more dollars and reduce depreciation of rupee could help restore inflows which could also increase appreciation of the rupee and lower inflation and interest rate and expectations which have been the prime causes for outflows, besides higher oil prices which have further increased demand for the dollar...
The problem in INDIA is inflation and inflation expectations due to weak supply of oil, and of dollar also, compared to demand, which are also the causes of depreciation and expectations and outflows and further depreciation and expectations and interest rate hike and expectations which are likely to make credit costly when inflation and inflation expectations have already reduced demand and growth expectations...
The effect of higher import prices due to weak currency would be magnified by further import tariffs on the economy... and could invite foreign retaliation...
Foreign capital is important for INDIA at this point of NPAs and slow investment pick up...
For this to happen it is important that INDIA commit a stable and low inflation and strong exchange rate and higher foreign capital inflows...
Lower inflation and lower wage demand and lower interest rate could also make the exports competitive if exchange rate remains stable or depreciate little (due to lower interest rate)...
The government might lower oil prices and the RBI might try to increase supply of dollars in the exchange market to reduce inflation and depreciation and expectations and increase interest rate cut and rate cut expectations which is further likely to reduce cost and prices the economy wide...
Oil companies are exporting inflation and CAD which have increased depreciation in the EMs and exports to the US... The higher Oil prices are the result of supply cut by the OPEC... Higher oil prices are due to increased Cartelization...
The US…
The continuous lose money supply and longer and lower interest rate expectations, QE after zero lower bound, might have delayed spending and growth in the US, like higher supply and lower price expectations delay demand and spending in the stock market, which rest low as long as QE kept pouring money...
Probably, when the QE stopped, subjects stopped expecting lower interest rate and resumed spending; they also might have expected higher interest rates... Higher supply of money lowers interest rate and expectations.....
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