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As RBI buys dollars, Rupee falls 2.5% in 2019 despite huge foreign funds flow

Sandeep Singh, Sunny Verma
As RBI buys dollars, Re falls 2.5% in 2019 despite huge foreign funds flow

"The government and the RBI are on the same page on this,” an economist advising the government said.

In an apparent change in stance away from managing excess volatility in the rupee, the Reserve Bank of India seems to be containing any sharp appreciation in the currency. Despite the recent gush of foreign fund flows into the equity and debt markets, the rupee has remained relatively weak against the United States dollar.

A weak currency aids exports, and helps a country be competitive in international trade. Many countries including China and Brazil are alleged to have kept their currencies weak, provoking the US to either impose or threaten tariffs on their products.

In the current calendar year so far, the rupee has depreciated by almost 2.5 per cent, even as foreign portfolio investors (FPIs) have pumped in a net Rs 1.31 lakh crore. “At a time when the economy is slowing, rupee appreciation would have further hurt manufacturing exports and jobs.

The government and the RBI are on the same page on this,” an economist advising the government said. “Instead of managing the excessive volatility in the currency price, the authorities seem to be working to ensure that the rupee does not appreciate despite funds flowing in,” another industry analyst said, asking not be named.

This a subtle shift in RBI’s position of letting the rupee find its own market value, and intervening only to manage undue volatility.

Analysts said the RBI has been buying dollars to keep the rupee from sharp appreciation. This is reflected in the surge in India’s foreign exchange reserves by almost $20 billion to $448.59 billion on November 22 from $428.60 billion on August 30.

Explained

To shore up floundering exports

An appreciation of the currency would have hurt exports in general, and manufacturing exports in particular. At a time when growth has dropped below 5%, RBI’s dollar buying in the face of rising FPI inflows helps manufacturing, which is already contracting. But for this, exports, which have remained flat, might have actually contracted.

“During 2019-20 so far, the rupee has traded in a narrow range, with modest appreciation in Q1 giving way to some depreciation in August and the first half of September. For the rupee, the IMF (estimates imply) that the currency is fairly valued and broadly in line with fundamentals,” RBI Governor Shaktikanta Das said on September 19.

The RBI has no target or band for the exchange rate, and interventions are intended to manage undue volatility, Das said.

Over the last 11 months, FPIs have poured in Rs 1,31,291 crore, and forex reserves have jumped by around $55 billion (for the week ended November 22). The rupee, on the other hand, has weakened against the US dollar from 70.02 at the beginning of the year to 71.20 on December 3, 2019.

It is also important to note that crude oil prices have remained largely stable. It was around $60 per barrel in January, climbed to levels of $75 in April, and is currently trading around $65 per barrel.

By comparison, in 2017, when FPIs pumped over Rs 2,00,000 crore into the Indian securities market and forex reserves jumped by $49 billion, the rupee also strengthened significantly against the dollar from 68.37 in the beginning of January 2017 to 63.5 at the end of December.

The rise in forex reserves, however, lends some stability to the economy and gives it the ability to cover the external debt in case of an oil shock. There has been a sharp increase in India’s external debt over the last couple of years from $485 billion in June 2017 to $557 billion in June 2019.