When it comes to currency appreciation/depreciation, a host of factors leads to moments in the currency, like inflation in the domestic economy, moments of bond yield across economies, interest rate scenarios in developed economies, import-export to the domestic economy, etc. In this article we have tried to cover some of the factor which might be effecting Rupee to depreciate.

Due to the effect of uneven rain and rising vegetable and pulses prices, the market expects Consumer Price Index (CPI) inflation data for July, which will be released later today at 5:30 pm, is likely to come hotter than expected in comparison to June numbers. Indian central bank is mandated with two roles, keeping low inflation and steady GDP growth. To keep inflation under control and facilitate max economic growth, reserve banks use interest rates as steering to influence the economy, which, in turn, affects the currency's value. Increasing/decreasing the benchmark rate influences the real rate, which in turn affects the demand for the currency higher/lower. In a recent RBI policy meeting, RBI, through its inflation projection, is prepared for a significant price increase in July, with the CPI inflation forecast for July-September increasing by 100 bps to 6.2 percent. But if the inflation comes in far hotter than RBI estimates, the market can expect a knee-jerk reaction as RBI will be forced to hike to control inflation, keep real interest rate differential in line with western counterparts and support currency.

The Indian economy has been showing resilience despite a 20% surge in oil prices to a three-month high, from a low of $70 to $85 per barrel. However, it presents challenges for Indian importers and the economy due to a widened trade deficit. This escalates the demand for dollars and consequently exerts pressure on the Rupee. India's trade deficit continued to fall on a monthly basis. Higher foreign remittances and robust services exports further helped the current account deficit shrink at a faster pace, which is likely to support the local currency.

Foreign institutional investors (FII) and foreign direct investment (FDI) have been why Indian markets are reaching new highs. If we drop August numbers, FII has pumped over Rs. 70,000 cr in the past three months. Strong FII and FDI flow into India often strengthen the INR but returns of FII to selling can show weakness in Rupee.

The benchmark US 10-year Treasury yield rose as to nearly 4.17%, the highest since October last year. Notification from US Treasury saying it would be borrowing $1 trillion by issuing long-term debt this quarter to rover the growing deficit.