Despite pressures, the rupee’s remarkable resilience

Source: This post is based on the article “Despite pressures, the rupee’s remarkable resilience” published in The Hindu on 23rd July 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources.

Relevance: To understand the performance of the Indian Rupee to the US Dollar.

News: The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year.

What is the position of the dollar and the US?

The dollar has strengthened against all currencies, developed or emerging. The consumer price index (CPI) inflation in the United States reached a multi-decade high of 9.1% in June 2022. This prompted the reversal in the monetary policy stance of the US Federal Reserve.

The rate hiking cycle by the US Federal Reserve has caused the dollar’s appreciation which has led the dollar index to strengthen by over 11% in 2022 so far, taking it to a 20-year high.

What is the situation of the Indian rupee?

India’s foreign exchange reserves have moderated by almost $55 billion from a high of $635 billion.

The rupee has fallen sharply against the dollar, but the depreciation has been relatively lower compared with past crises such as the global financial crisis of 2008 (the rupee had weakened by over 20% between December 2007-June 2009) and the Taper Tantrum of 2013 (for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%).

What is the RBI’s response to the performance of the Rupee?

What are the effects of a weak rupee?

What should be done to strengthen the rupee?

Firstly, the Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE. This will help increase the weight of Indian equities in these indices and also compensate for foreign portfolio outflows to some extent.

Secondly, The Government could also assist India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index. This will a)  Lead to forex inflows, b) Have a soothing impact on interest rates, c) Provide the central bank with the requisite ammunition in case there is further weakness.