India forex reserves news and observer
Therefore, there was no political constituency whatsoever for it. So, strict import licensing buttressed by exchange control became the default choice. Many of the problems associated with the licence-permit raj that followed in the s and beyond had their origins in this fateful policy choice. Even then, the government found itself compelled to devalue the rupee subsequently in June But it was too little too late by then and, moreover, the policy was ill-timed.
Two back-to-back droughts effectively overwhelmed any positive effects that the devaluation could have had. Though the current policy environment is very different from that in the s, the lessons of this episode remain relevant. The origins of the pressure on the rupee today are to be traced not in higher inflation rates at home but in the rising interest rates in the US in the face of high degree of international mobility of financial capital.
Attracted by these high interest rates, financial capital in India seeks to flow to the US and puts downward pressure on the rupee. As in the s, India, specifically RBI, has two options in the face of these capital outflows: Just as it used sterling balances to meet the demand for imports in the s, it can draw upon its stock of foreign exchange reserves to finance capital outflows at the prevailing exchange rate.
It can make it attractive for the private agents to supply the necessary dollars by letting it appreciate and the rupee to depreciate. If the RBI chooses the first strategy while its trading partners choose the second, Indian goods become uncompetitive vis-a-vis those of the latter. As in the s, exports would suffer and the temptation to increase protection against imports would rise.
Additionally, there is the risk that - as happened with the sterling balances in the s - our foreign exchange reserves will drop and undermine the ability of RBI to credibly stabilise future exchange-rate fluctuations.
Appreciation for the Dollar While RBI has used a mix of these two options till date, it has relied more heavily on the first than is the case with several of its trading partners. Consequently, its reserves have seen a significant depletion, while Indian goods have experienced a loss of competitiveness vis-a-vis those of the latter. Most recently, the central bank seems to have concluded that the US war on inflation - and, therefore, its interest rate hikes - and pressures for financial capital outflows from India are likely to continue for some time.
The increase in imports is mainly due to a sharp increase in oil prices following the Ukraine crisis. The increase in the import bill for coal and other essential commodities particularly raw materials has bloated the import bill. The falling of the rupee signifies the depreciation of its value against the US dollar, which broadly means the government, companies and citizens are forced to pay increasing amounts of money. The depreciation of money is a direct indication of inflation.
As the price of the rupee falls, importing goods and raw materials becomes increasingly expensive, which then pushes up the prices in the domestic market. India is the world's third-largest consumer of oil and imports over 80 percent of it from other countries to meet its needs. A weakening rupee puts pressure on the already high import prices of crude and raw materials, resulting in higher imported inflation.
With the increase in fuel prices, the prices of almost all the other goods and products sold in India also increase. If the prices of crude oil continue to rise, there is a possibility that the falling of the rupee will continue. Thus, inflation in the country would continue to rise as well. On the other hand, a stronger dollar means you need more of Indian currency to buy it than before.
The personal finances of the Indians get impacted both directly and indirectly by the falling of the rupee. As India is predominantly an import-dependent nation, the consequences of a weak rupee are more severe. Imported goods become more expensive and therefore a weakening of the rupee is one factor contributing to rising inflation at present. The prices of household goods are also expected to go up.
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H1 FY23 CV, 3W Sales Analysis: Industry on growth track; Tata Motors, Bajaj Auto lose market share Even though the commercial vehicle segment has not touched its peak, it is expected to grow in double digits this fiscal year, owing to healthy demand and low base of last year. The difference between the sell rate and the buy rate is the forward premium. The central bank does not provide reasons behind forex reserves movement. If realised, that would be the lowest level in over two years.
Finance minister Nirmala Sitharaman on Monday had said "due to the strength of our microeconomic fundamentals, rupee is holding out well. The rate of fall of other currencies vis-a-vis against the US dollar has been sharply much more than the Indian rupee".
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