currency, macroeconomics, inflation, interest-ratesThe Indian rupee is only partially convertible. It is fully convertible on current account but there are limitation on the convertibility on capital accounts. The Indian bank intervenes mainly via state owned banks in the USD/INR trading mainly to reduce volatility. The interest level in India is quite high, which means that bank loans for companies are very costly. India is also had a high inflation over the last years even though it has come down a bit.
According to Mundell-Fleming model, an increase in interest rate should stabilize the currency rate depreciation and also reduce the inflation. During the time of high interest the inflation has come down, though not yet enough, but the currency rate has not stabilised at least not yet.
Four months back the currency rate against the USD was INR55, then it went down to INR48 in early February and it went up to INR 52.7 on April 21. But on April 17, RBI cut the benchmark interest rate from 8.5% to 8%.
What would be the likely effect on the currency rate and which factors would mainly affect this?
Reference: http://www.dnaindia.com/money/report_rbi-cuts-interest-rates-emis-to-come-down_1676953
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