Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Rescuing the rupee: A peek into the RBI’s arsenal

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Fall of the rupee in recent times and factors affecting its value


Rupee may slump further

  1. With the current-account deficit set to widen, thanks to higher oil prices and outflows from stocks and bonds, the rupee could be in for some more weakness
  2. Increasing the interest rate and burning billions in foreign reserves have done little to reverse the rupee’s standing as Asia’s worst-performing currency this year
  3. India could turn to other weapons in its arsenal if things deteriorate further

Factors affecting rupee

  1. Trade wars
  2. Sanctions on Iran
  3. Oil prices
  4. The US Fed rate decisions

Tools available with RBI

1 Raising rates

  • The Reserve Bank of India (RBI)hiked rates for the first time in four years in June and is likely to follow through in the coming months
  • Part of the reason behind a rate hike is to maintain stability on the rupee front
  • The central bank doesn’t target the exchange rate and attributes any rate moves to its goal of containing rising prices

2 Intervention

  • The RBI is suspected to have intervened regularly in the foreign exchange market
  • India’s foreign exchange reserves fall to $406 billion
  • Of these nearly $100 billion are in short-term debt, assets which the RBI considers are hot money and can leave the country anytime

Higher tariffs

  • The trade war is a new weapon in town
  • India, with its past experience of relying on higher duties to curtail imports, could use it to curb current-account deficit
  • In the aftermath of taper-tantrums in 2013, India hiked import duty on gold bullion and jewellery. That saw inflows shrink, helping narrow the current-account gap

Tap non-residents

  • One of the last resorts will be to turn to wealthy non-resident Indians to replenish precious foreign currency reserves
  • India has that option and also a sovereign bond issuance

Fight panic

  • Verbal intervention is always an option
  • RBI officer had said that India has sufficient “firepower” to deal with the rupee’s decline
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