How should one think of the future of the rupee in the medium to long term? The simple answer is that it depends on the fate of the dollar. While this might sound like an empty tautology, we think it is not as trivial as it appears. The conventional tack to gauge the dollar’s behaviour is to look at the trade weighted dollar index, an average of dollar exchange rates against eight major developed market (DM) currencies. The rupee is not part of this basket but its movements are influenced quite significantly by what happens to this index.
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