The Indian rupee hit a 16-month high against the US dollar on Wednesday, ahead of the US Federal Reserve’s decision on interest rates.

The chart compares the rupee-dollar exchange rate with the broad nominal trade weighted US Dollar Index, taken from the Federal Reserve Bank of St Louis, Missouri.

This broad currency index includes the euro area, Canada, Japan, Mexico, China, the UK, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, the Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia. The chart, therefore, shows how the USD-INR has performed versus a broad basket of currencies.

The chart shows two things: one, the sharp fall in the value of rupee last December—that is as it should be, because the strength of the broad Dollar Index should mean a weaker rupee. But then there was a sharp recovery in rupee on the basis of a slightly weaker dollar. And very recently, rupee has strengthened in spite of a stronger broad Dollar Index.

That means the rupee’s strength is based on domestic factors, with large portfolio inflows attracted by India’s political stability, low current account deficit, lower inflation and growth prospects.

All eyes will, however, be on FOMC’s commentary. If it signals more than three rate hikes this year, then the dollar is likely to strengthen. If not, INR should remain strong. Provided, of course, India delivers on growth.

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