{"id":194755,"date":"2022-07-08T16:56:41","date_gmt":"2022-07-08T11:26:41","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=194755"},"modified":"2022-07-08T16:56:41","modified_gmt":"2022-07-08T11:26:41","slug":"defending-the-rupee","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/defending-the-rupee\/","title":{"rendered":"Defending the rupee"},"content":{"rendered":"\n

Source<\/strong>: The post is based on an article \u201cDefending the rupee\u201d<\/strong> published in the Business Standard<\/strong> on 8th<\/sup> July 2022<\/strong>.<\/p>\n

Syllabus<\/strong>: GS 3 Indian Economy;<\/p>\n

Relevance<\/strong>: Macroeconomic Conditions; Stabilization of the Indian Rupee<\/p>\n

News<\/strong>: The Indian rupee<\/strong>\u00a0and the currencies across<\/strong> the world, including in the developed economies, are under pressure. The Indian rupee has depreciated by about 4.4%. Therefore, the Reserve Bank of India (RBI)<\/strong> has announced measures.<\/p>\n

The RBI\u2019s foreign exchange reserves have come down by over $37 billion since the beginning of the year. Therefore, the RBI aims to boost foreign exchange inflows<\/strong> to support the Indian Rupee.<\/p>\n

What are the reasons behind the RBI decision?<\/strong><\/h5>\n

The rupee\u00a0is under pressure because of a variety of reasons. They are as below:<\/p>\n

(1) Higher commodity prices and increasing imports have pushed up demand for foreign currency.<\/p>\n

(2) In June 2022, the trade deficit expanded to $25.6 billion. The current account deficit (CAD) is expected to cross 3 percent of gross domestic product this fiscal year.<\/p>\n

(3) India is witnessing large outflows<\/strong> on the capital account<\/strong>. The FPIs (Foreign Portfolio Investors) have been selling Indian assets on account of rising risk aversion<\/strong> in the global financial system<\/strong> as well as increasing interest rates<\/strong> in the US. For example<\/strong>, the FPIs have taken out over $30 billion<\/strong> since the beginning of the year, from India.<\/p>\n

What are the measures that RBI is taking, to control the fall in currency value?<\/strong><\/h5>\n

Following are some of the measures announced by RBI:<\/p>\n

Banks will be exempted from maintaining the CRR and SLR for incremental non-residential external and foreign currency non-resident bank deposits for a limited period.<\/p>\n

Banks have been given more freedom in terms of offering interest rates on the above-mentioned deposits.<\/p>\n

The rules for FPIs in the debt market have been relaxed. The Indian firms have been allowed to borrow abroad in more liberal terms.<\/p>\n

Why would the above steps have a limited impact?<\/strong><\/h5>\n

At present, there is a global environment<\/strong> for the overall global risk aversion. <\/strong><\/p>\n

The companies may not be willing to borrow<\/strong> abroad because of the pressure on the rupee.<\/p>\n

The overall policy direction<\/strong> may end up increasing risks. It may not be a wise step to increase the foreign debt of short-term nature, in order to defend the currency.<\/p>\n

The global environment is likely to remain uncertain<\/strong> for some time. Therefore, the RBI’s move to defend the currency may become increasingly costly and perhaps unsustainable.<\/p>\n

The Way Forward<\/strong><\/h5>\n

The RBI has ample reserves (<\/strong>$593 billion<\/strong>)<\/strong> to quell excess volatility<\/strong>. Therefore, it should allow the rupee<\/strong> to depreciate in an orderly way. It would benefit in the following ways:<\/p>\n

(1) It would protect the tradable sect<\/strong>ors<\/p>\n

(2) It would also make Indian assets<\/strong> more attractive to foreign investors<\/p>\n

(3) It will help stabilize the overall external account<\/strong> and the currency<\/strong>.<\/p>\n

Further, the RBI should address the inflation problem through monetary policy.<\/p>\n

In addition to the above, the RBI should encourage firms to hedge foreign currency risks.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on an article \u201cDefending the rupee\u201d published in the Business Standard on 8th July 2022. Syllabus: GS 3 Indian Economy; Relevance: Macroeconomic Conditions; Stabilization of the Indian Rupee News: The Indian rupee\u00a0and the currencies across the world, including in the developed economies, are under pressure. The Indian rupee has depreciated… Continue reading Defending the rupee<\/span><\/a><\/p>\n","protected":false},"author":10308,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216],"class_list":["post-194755","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704845949},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/194755","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10308"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=194755"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/194755\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=194755"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=194755"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=194755"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}