scorecardresearchRBI spent $41 billion over 5 months in defending rupee, says report

RBI spent $41 billion over 5 months in defending rupee, says report

Updated: 04 Jul 2022, 10:22 AM IST
TL;DR.

High oil prices and continued FPI outflows are two of the major reasons that are impacting the domestic currency.

The domestic unit has lost 1.97 per cent so far this month and has eroded a staggering 6.39 per cent since the start of this year.

The domestic unit has lost 1.97 per cent so far this month and has eroded a staggering 6.39 per cent since the start of this year.

The Reserve Bank of India (RBI) is estimated to have spent more than $41 billion of its reserves since February this year in defending the rupee, TOI reported. As a result of this and the rising crude bill, the reserves — which were enough to cover over one year of imports — can now cover less than 10 months.

According to Barclay's, the RBI will look to recoup lost reserves when the flows cycle turns, limiting the scope for rupee appreciation. This is similar to the strategy adopted by the RBI in the past. "We have highlighted evidence that foreign reserves insure against financial crises, such as the current global risk-off event, which is why the RBI builds up reserves. This seems to have proved broadly correct, with the rupee largely stable over the entire COVID crisis, "the report said.

Further, the report said the need for the RBI’s intervention on the grounds that imported inflation is a major problem and supporting the rupee is a better alternative to curbing demand through rate hikes. Second, the rupee is not overvalued in terms of the real effective exchange rate (REER), which is calculated by measuring the rupee-dollar movement with the movement of a basket of other currencies.

Third, inflation is not as much of a worry in India as it is in the West. "Even in the current episode, price concerns in India are relatively less severe than in advanced economy peers, which are facing inflation at multi-decade highs. RBI deputy governor Michael Patra noted that inflation may have already peaked in India, with price pressures likely moderating faster than for global peers," the report said.

Last month, Bank of America said Rupee may extend declines to a record of low 81 per dollar by year-end due to rising prices of crude and other raw materials. High oil prices and continued FPI outflows are two of the major reasons that are impacting the domestic currency.

The domestic unit has lost 1.97 per cent so far this month and has eroded a staggering 6.39 per cent since the start of this year.

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First Published: 04 Jul 2022, 10:22 AM IST