Reserve Bank of India Governor Shaktikanta Das on Friday assured that despite the recent depreciation in the Indian rupee vs the US dollar, the domestic currency is holding well as compared to advanced and emerging market (EM) peers including the Japanese Yen, British Pound and Euro. Rupee has been on a falling spree of late due to inflation fears, FII selling, US dollar strengthening, and rising commodity prices. Rupee is holding well due to India’s underlying strong and resilient macroeconomic fundamentals, Shaktikanta Das said at an event today. He emphasised that RBI is supplying US dollars to markets in order to ensure that there is adequate liquidity in the forex market.
The RBI governor in his address mentioned that the country is going through a turbulent time due to Covid pandemic, Russia-Ukraine war, high inflation, supply-chains disruptions, elevated commodity prices, recession fears, monetary policy tightening by central banks, high interest rates, strengthening US dollar. All these factors are causing financial stability challenges in emerging markets like India leading to EM currencies’ depreciation. “RBI has been supplying US dollars to the market to ensure adequate supply of liquidity. Also, it is necessary to look at unhedged forex exposures factually, rather than being alarmed by it,” Das said.
Zero tolerance for rupee volatility
He added that the central bank has zero tolerance for volatile and bumpy movement of rupee and therefore the RBI actions so far have helped in smooth movement of the domestic currency against the greenback. Note that so far this year, the rupee has depreciated around 8% and has been hitting new record lows against the American currency since the past few sessions. The currency has crossed the 80 level on the back of monetary policy tightening and persistent FPI outflows from capital markets. India’s widening trade gap and capital outflows have also weighed on the rupee. “India will continue to engage with the forex markets and will ensure that the rupee will find its optimal level as compared to its fundamentals,” Das said.
Measures taken by RBI to restrain Rupee’s freefall
Typically, the RBI intervenes in the market through liquidity management, including through the selling of dollars. India’s forex reserves had dropped for five out of the past six straight weeks, on account of RBI’s likely intervention in the market to defend the depreciating rupee. Additionally, the RBI recently allowed cross-border commerce transactions in rupees in order to restrain the freefall in Rupee. Earlier this month, the banking regulator requested banks to make additional preparations for exports and imports to be invoiced, paid for and settled in the rupee. This was done to support the growing interest of the international trading community in the domestic currency and to encourage the expansion of global trade, with an emphasis on Indian exports.
Shaktikanta Das said that Indian economy is relatively better placed amid a turbulent global economic scenario, drawing strength from its strong macroeconomic fundamentals. “The Indian banking system is well capitalised, asset quality has improved and banks have returned to profitability,” he said adding that the RBI remains watchful to ensure price stability. The Monetary Policy Committee raised interest rates by a cumulative 90 basis points in recent months to fight a high inflation that has stayed above the 6 percent mark for six months in a row.