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"The exchange rate between any two currencies is connected by a relation called the uncovered interest rate parity. It basically implies that there should be no arbitrage opportunity for FX spot traders (see [1] for an in-depth explanation). Currently, since the interest rate in India is much higher than that in the US (India \u2013 8.46%, US \u2013 0.11%), the INR should appreciate relative to the USD. However, since investors are aware of Fed\u2019s intentions, they will act accordingly. As per recent news reports, FII inflows into India have already started slowing down (see [3] for details). This has made the INR volatile (see figure below \u2013 taken from source [4]) and the government has used up about USD 3 bn of its USD 320 bn forex reserves over the past two weeks to stabilise the INR (note the stability later in the graph). Basically, the govt. buys INR using USD to create artificial demand for the INR to make it appreciate. This effect cancels the depreciating effect caused by reversals of FII movements."^^<http://www.w3.org/2001/XMLSchema#string>
<http://www.mbaskool.com/business-articles/finance/12270-us-federal-rate-hike-and-its-implications-on-the-usd-inr-exchange-rate.html>