Even after bringing in measures designed to enhance liquidity and encourage foreign exchange inflows into the country, the Reserve Bank of India (RBI) could not stem pressure on the rupee even though many believed it would strengthen. Not only is it yet to climb even against the US Dollar, global cues, capital flight, high oil prices, high dollar demand continue to weigh down the rupee, while RBI’s moves are seen supporting it rather than giving it strength.
What is RBI’s rescue package?
The RBI announced a slew of measures to boost the availability of dollar in the Indian financial system. The measures are to ensure higher dollar liquidity and attract foreign investment into the country. One such measure includes allowing the banks to raise foreign currency loans through this avenue.
Also, the central bank has initiated measures to ease pressure on the forex market to reduce volatility.
The goal of the RBI is seen as ensuring a smooth currency market rather than pushing the dollar to higher level. According to them, the central bank usually ensures stability in the currency markets rather than trying to fix it at a certain rate.
Why is the Indian rupee not appreciating?
1. Overseas Investors Are Still Selling
The rupee’s weak trend can be attributed primarily to continued pullout of money by foreign investors from the Indian equity and bond markets. These investors exchange their rupees in dollars before moving money overseas – which increases the dollar’s demand and weakens the Indian rupee. Although Indian markets are stable, the caution among overseas investors owing to global risks continues.
2. Crude Oil Prices Continue to Drive Demand for the Dollar
As India is highly dependent on oil imports, any surge in international crude prices translates to increased demand for dollars as importers (Indian refiners) require dollars to meet their oil payment obligation. The Middle East tensions have helped push crude prices higher. The global oil price hover in range as tensions brew in Middle East.
3. USD Strength is Undoing India’s Policy Intervention
The US dollar has gained steadily over global currencies as it continues to rise on the back of higher-interest rate environment in the States coupled with the preference for safest havens by investors. Usually when the Dollar strengthens against major global currencies the Indian currency also weakens against Dollar.
4. RBI Is Concerned About Preventing Too Much Volatility
Market players expect that the RBI’s policy measures are to avert panic-induced selloff rather than aiming for an appreciation of the rupee. An appreciating currency could adversely impact the country’s exports, which would then have a cascading effect on other sectors. RBI, at its best, would try to curb wild fluctuations in the exchange rate.
How RBI is supporting the rupee?
The RBI is ensuring to supply dollars through the FX markets whenever it sees pressure building up. Through continuousdollar sale in the FX market the RBI has successfully stopped rupee breaching record highs and depreciated very steeply even as globally dollar remains firm and oil prices at these elevated levels are testing India’s imports at large. Through the current actions, the RBI would aim to manage disorderly currency movements.
Impact of Rupee Depreciation on Businesses and Consumers:
If any business is importing oil, machinery, electronics, etc, they are at a disadvantage when the rupee weakens. They will require more rupees to buy the same unit from abroad.
However, India’s exports might benefit from a cheaper rupee as Indian products become more affordable for buyers in dollar-denominated markets.
Consumers will feel the heat when it comes to travelling abroad, as well as purchasing imported goods and services including food items, apparel, electronics and cars.
What should one watch?
Global crude prices, foreign investment trends, the central bank’s future actions, and cues from the US Federal Reserve policy will be key in dictating future movements of the Indian rupee, many market observers say. A possible slowdown in crude oil and the revival in foreign investment could put support to the Rupee, even as geopolitical and economic pressures show no sign of slowing down soon.
Can Rupee Appreciate?
Economists expect the Rupee to steady going forward if oil prices come down, foreign inflows gain traction, and geopolitical tensions ease. Though significant appreciation may not happen in the near term on the basis of the factors mentioned. The RBI may be expected to bring more tools to control volatiltity and manage liquidity going forward.
Conclusion
Although the Indian rupee has not significantly appreciated, RBI’s measures are certainly playing a role in providing more dollars in the financial system. However, this is not sufficient to tame foreign portfolio investment outflows, persistently high crude oil prices, strong global demand for dollar, and other global geopolitical risks, which are being seen currently as putting downward pressure on the Indian rupee. For now and going ahead, a mix of domestic policy support and changing global macro conditions will play significant role.
