With the rupee weakening to record low levels and the RBI reportedly preventing it from falling below 80 against the US dollar last week, government s
With the rupee weakening to record low levels and the RBI reportedly preventing it from falling below 80 against the US dollar last week, government sources said that the Centre and the Reserve Bank have been taking steps to attract dollar inflows and make the dollar appreciation against the rupee more gradual and smoother.
The US dollar has strengthened not only against the Indian rupee but against many other major currencies, an official said, adding that this year the rupee has strengthened against the Euro, the Japanese yen and the British pound. “Even though the strength of the US dollar against the Indian rupee has been quite mild, the Indian government and the central bank have been taking steps to attract dollar inflows, to make the appreciation of the dollar against the Indian rupee more gradual and smoother,” a government official said.
Foreign exchange, or forex, reserves fell by $8.06 billion to $580.02 billion during the week ended July 8, in the wake of the appreciation of the dollar and capital outflows from India, triggered by the rise in inflation and rate hikes by the United States.
Impact of fund outflows
Foreign investors pulling out funds from Indian markets — Rs 2.24 lakh crore from equities and Rs 15,749 crore from debt since this January — has been putting severe pressure on the rupee as well as the forex kitty.
With this, forex reserves have dived by $62.4 billion from the record high of $642.45 billion on September 3, 2021. A major reason for the decline in forex reserves is capital outflows by foreign portfolio investors (FPIs) as the US Federal Reserve started the monetary policy tightening and interest rate hikes.
As the value of the rupee fell to 79.88 against the dollar by Friday, the RBI reportedly prevented the domestic currency from falling below 80 by selling dollars in the last two days.
Government sources said that the Reserve Bank of India (RBI) is regularly monitoring the forex market and intervenes in situations of undue volatility. “For its interventions, it uses its foreign exchange reserves which continue to be at comfortable levels,” an official source said.
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The increase in inflation rate in the US and developed countries led to their central banks responding by raising interest rates in March. The Ukraine war raised the oil prices and uncertainty. “On account of both these reasons, investors turned cautious. When they become cautious, they begin pulling money out of emerging markets like India. Foreign investors have pulled out nearly $31.5bn total from the beginning of FY22 and up to July 15 in 2022-23,” the source said.
The rise in the price of oil has pushed up India’s import bill this year, which also implied more demand for US dollars to pay for crude oil, the person added.
indianexpress.com