Forex Kitty, Nri Flows Support Rupee In War | Mumbai News

MUMBAI: In the year since the Russian invasion of Ukraine, the rupee has weakened by almost 800 paise or 9.8% against the US dollar. Although the decline has been the sharpest since the taper tantrums of 2013, the external sector has shown resilience on many fronts.
For starters, the domestic currency has outperformed most of its peers and currencies of advanced economies when seen over a two-year period, starting from 2021, when it declined 12.5%. Many emerging market currencies have depreciated more. They include Thai Baht (12.6%), Korean Won (14.6%) and South Korean Rand (20%). Even currencies of advanced economies such as the UK have weakened more than the rupee (14.5%).

Unlike earlier years, the rupee faced a triple shock of rising crude oil and other commodity prices, sudden hikes in interest rates by the US Fed and other central banks and declining exports due to an economic slowdown in the West coupled with supply-side issues. Yet the rupee was stabilised without the RBI bending over backwards to attract dollars by guaranteeing returns on special deposits.
The biggest impact of the Ukraine war has been on the country’s current account deficit (CAD), which widened to $36 billion in the third quarter of 2022, equivalent to 4.4% of the GDP from $9.7 billion in the corresponding quarter last year just before the conflict. In the January-March 2022 quarter, the CAD widened to $22.1 billion as crude oil prices remained stubbornly above the $100/barrel level.
Foreign funds, which under normal times help bridge the gap in the current account, were also net sellers last year offloading shares worth Rs 2.8 lakh crore. Despite these challenges, the country did not face a problem on the balance of payments front thanks to the stockpile of over $632 billion of foreign exchange reserves that the RBI had built up before the war. This ensured that the central bank was left with $567 billion of reserves even after it expended nearly $100 billion to balance the demand for foreign exchange through interventions in the spot and forward market.
While the war continues to simmer in Ukraine, there are indications that the current account position could improve significantly due to a surprise surge in services exports. The balance of payments is also receiving support from non-residents with flows into NRI deposits rising 76% to $5.4 billion in April-December 2022 despite rising interest rates in the US.