Current rupee fall way lower than in earlier crises

Current rupee fall way lower than in earlier crises

The rupee’s depreciation against the dollar in the wake of the Omicron onslaught and the Ukraine war this year is way lower than its slump during earlier crises, according to a finance ministry analysis.

While the rupee has depreciated almost 7% against the greenback since January 2022, it had lost as much as 28% during the so-called taper tantrum (May 3-August 28, 2013), 28% during the global financial crisis (February-October 2008) and the 22% during the Asian financial crisis (August 1997-August 1998).

To ease pressure on the foreign exchange reserves apart from smoothening volatility in the forex market, the central bank has been initiating steps in consultations with the government. Economic affairs secretary Ajay Seth recently saidthe “well thought-through” steps would have a “positive impact” on capital inflows from overseas and help an orderly movement of the domestic currency.

Earlier this month, the Reserve Bank of India (RBI) allowed overseas investors to buy short-term corporate debt and permitted more government securities under the fully accessible route. It doubled the external commercial borrowing (ECB) limit under the automatic route to $1.5 billion, among others. Subsequently, it allowed trade settlement between India and other countries in rupees.

Currencies of many countries, both advanced and emerging markets, have been weakening sharply against the dollar, especially after the US Federal Reserve started raising interest rates from March to curb runaway inflation.

The Ukraine war hit the global supply chains and contributed to a surge in oil prices, which drove up the current account deficit of many nations, including India. Foreign portfolio investors have pulled out nearly $31.5 billion from the Indian markets since April 2021.

The RBI has been intervening in the market since the outbreak of the Ukraine war in late February to prevent a sharp depreciation of the rupee.

“The Reserve Bank of India regularly monitors the foreign exchange market and intervenes in situations of undue volatility. For its interventions, it uses its foreign exchange reserves which continue to be at comfortable levels,” said one of the sources.

The country’s foreign exchange reserves stood at $580 billion as of July 8, a 15-month low, having dropped from $634 billion in the beginning of 2022, primarily due to its interventions to defend the rupee.