Currency pressure – The Depreciation of the Rupee | 24th September 2022 | UPSC Daily Editorial Analysis

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What is the article about?

  • The depreciation of the rupee is due to actions taken by the Federal Reserve Bank of the USA to curb inflation.

Relevance:

  • GSIII; Indian Economy, Exchange Rates;
  • Prelims: impact of global events on the Indian Economy.

What is the issue?

  • The rupee is yet again facing renewed pressure, along with major peers, as the dollar continues to strengthen in the wake of the Federal Reserve’s latest jumbo 75 basis points interest rate increase and the U.S. central bank’s unequivocal message that it remains squarely focused on taming inflation.
  • The Indian currency weakened past the 81-mark against the dollar for the first time ever in Friday’s intraday trade.

What are the steps taken by the RBI to strengthen the rupee?

  • The rupee’s slide was softened by the Reserve Bank of India’s intervention to smoothen volatility;
  • the cumulative impact of such interventions over the 12 months through September 16 have shrunk the RBI’s war chest of foreign exchange reserves by almost $94 billion to $545.65 billion.

Analysis:

  • The fact that the rupee is not alone in depreciating against the dollar can be of little comfort to Indian companies reliant on imports of raw materials or services for the smooth functioning of their businesses.
  • They are struggling to contend with rising costs at a time when domestic demand is still to regain a durable post-pandemic footing.
  • The higher import bill is also bound to add inflationary pressures to an economy already beset by persistently elevated inflation and further complicates monetary policymakers’ efforts to rein in the price gains.
  • The rupee’s more than 8% depreciation against the dollar so far in 2022, with almost all of the weakening having occurred in the wake of Russia’s invasion of Ukraine.
    Overseas portfolio investors too have once again turned net sellers of Indian stocks and debt in the last two sessions after having resumed their purchases of local assets in August and for most of this month.
  • As a result, so far in 2022, FPIs have in total dumped $20.6 billion of Indian equity and debt following three straight years of net investments.
  • And the Fed’s projection of further steep monetary tightening, of at least another 125 basis points, is only likely to lead to more outflows over the last quarter of this year.

Way Forward:

  • With the rupee’s real effective exchange rate (REER), or trade-weighted average of its value, also signalling that the Indian currency is still overvalued, the RBI’s rate setting panel will have a fine tightrope to walk next week as it battles to restore a semblance of price stability without choking growth and by ensuring the rupee does not weaken too sharply.



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