New Delhi: Shaktikanta Das, governor of the Reserve Bank of India, said on Friday that the national currency is holding up well when compared to peers from advanced and emerging markets (EM), such as the Japanese Yen, British Pound, and Euro. Fears of inflation, selling by FIIs, a strengthening US dollar, and rising commodity prices have all contributed to the recent slump in the rupee. Shaktikanta Das stated at an event today that the rupee is performing well because of India’s underlying sound and resilient macroeconomic fundamentals. He emphasised that the RBI provides US dollars to markets in order to make sure that the foreign exchange market has enough liquidity.
In his speech, the RBI governor noted that the Covington pandemic, the Russia-Ukraine conflict, high inflation, supply-chain disruptions, elevated commodity prices, recessionary fears, tightening monetary policy by central banks, high interest rates, and a strengthening US dollar are all causing instability in the country. These factors collectively are producing issues with financial stability in developing nations like India, which is causing the depreciation of EM currencies.
“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.
He continued by saying that the RBI’s efforts to date have contributed to the smooth movement of the domestic currency versus the US dollar because the central bank has zero tolerance for the rupee’s unpredictable and erratic movement. It should be noted that the rupee has lost about 8% of its value so far this year and has just set fresh record lows against the dollar. The currency has surpassed the 80 threshold as a result of tighter monetary policy and ongoing FPI capital market outflows. The rupee has also been hurt by the increasing trade deficit and capital outflows from India.
“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.
The RBI intervenes in the market through controlling liquidity, which may include selling dollars. India’s foreign exchange holdings have decreased for five of the previous six weeks in a row due to the RBI’s potential market intervention to protect the weakening rupee. Additionally, in an effort to stop the rupee’s freefall, the RBI recently permitted cross-border trade transactions in rupees.
The banking regulator asked banks to take extra steps earlier this month so that exports and imports may be invoiced, paid for, and settled in rupees. This was done to foster the expansion of global trade, with a focus on Indian exports, and to support the growing interest of the world trading community in the native currency.
Shaktikanta Das said the Indian economy is comparably well positioned in the midst of a tumultuous global economic environment thanks to its solid macroeconomic fundamentals. He said that the RBI continues to keep a close eye on the market to preserve price stability, saying that ” “The Indian banking system is well capitalised, asset quality has improved and banks have returned to profitability.” In recent months, the Monetary Policy Committee increased interest rates by a total of 90 basis points to combat rising inflation that has remained above the 6 percent threshold for six consecutive months.
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