Reserve Bank Governor Shaktikanta Das Friday said the central bank will ensure that the rupee “finds its level” in line with its fundamentals with “zero tolerance” for volatile and bumpy movements of the currency.
“I would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution,” Das said.
“Due to the RBI actions, including measures to encourage inflows, the movements of the rupee have been relatively smooth and orderly. By eschewing sudden and volatile shifts, we have ensured that expectations remain anchored and the forex market functions in a stable and liquid manner,” he said addressing the Bank of Baroda Annual Banking Conference.
The rupee, which depreciated over 7 per cent since January this year, and dipped below the 80-level this week, closed at 79.85 against the dollar on Friday.
Das said the rupee is holding up well relative to both advanced and other emerging market economy peers as the economy’s underlying fundamentals arestrong, resilient and intact.
On using forex reserves to defend the rupee, Das said, “After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong.”
“And, may I add, you buy an umbrella to use it when it rains,” Das said.
“In recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt- servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity,” the Governor said admitting that the RBI was selling dollars to defend the rupee.
He said even reserve currencies such as the Japanese yen, the Euro and the British pound sterling have not been spared. “Portfolio funds are selling off assets and fleeing to safe haven. Emerging market economies are particularly affected by capital outflows, currency depreciations and reserve drawdowns, complicating macroeconomic management in these countries,” Das said.
Forex reserves have plummeted by $62.4 billion from the record high of $642.45 billion registered on September 3, 2021. Foreign portfolio investors have pulled out Rs 2.27 lakh crore from Indian markets since January this year.
Even though the rupee has depreciated sharply against the US dollar, it has appreciated against other major currencies such as the British pound, the Japanese yen and the Euro.
There is a view within a section of the Union Government that the RBI, while deploying reserves to curb currency market volatility, should allow some degree of market adjustment to play out in a calibrated manner for the rupee to find its level.
This is because imported inflation from energy prices is being cited as the biggest macroeconomic risk. This is unlikely to be addressed by monetary policy action but can be targeted by allowing the domestic currency to progressively depreciate, in line with most other major currencies.
Even as commodity prices have eased from their peak, they are expected to pose a substantial risk to the inflation trajectory as almost three-fourth of India’s inflationary pressure is seen as imported in nature. Capital outflows and the RBI’s defensive action to protect the rupee from a sharp slide have resulted in a slide in forex reserves, chipping away at a major macroeconomic buffer.
Newsletter | Click to get the day’s best explainers in your inbox
On the economy, Das said, “The recovery is gradually strengthening. The current account deficit is modest. Inflation is stabilizing. The financial sector is well-capitalized and sound. The external debt to GDP ratio is declining. The foreign exchange reserves are adequate.”
According to Das, it is important to recognize that spillovers from global monetary policy tightening, the geopolitical situation, the still elevated commodity prices – especially crude – and the lingering effects of the pandemic, all coming together, have become overwhelming worldwide.
The external sector is well-buffered to withstand the ongoing terms of trade shocks and the portfolio outflows, he said. “Banks are well-positioned to withstand even severe stress scenarios without falling below the minimum capital requirement. The RBI continues to remain watchful of the headwinds and shall be proactive in taking measures as necessary to ensure financial stability, he said.
He said currencies of emerging market economies and even of some advanced economies are depreciating vis-a-vis the US dollar. Consequently, inflationary pressures are building up and external funding conditions are becoming tighter, posing financial stability challenges in emerging market economies.