2024-11-21 12:27:00
The rupee appreciated 0.1% in September boosted by strong risk appetite following the US Federal Reserve’s outsized 50 bps rate cut.
However, the currency’s upside was limited due absorption of dollar inflows by the Reserve Bank of India.
The currency moved in a tight range in September from 83.8/$1 to 83.7/$1, as the RBI absorbed dollar inflows.
The RBIs foreign exchange reserves also reached a record high of $704.89 billion on September 27.
The stated position of the RBI is that it intervenes in the currency exchange market to cap excess volatility and does not target particular levels. The routine intervention by the RBI has caused overvaluation of the rupee compared currencies of its 40 trading partners.The rupee’s real effective exchange rate (REER) shows that the local currency was overvalued by 7.21% as of October 31, close to its highest level in nearly six years, RBI data showed.
REER is a measure of the currency’s competitiveness as against the 40 currencies.
Overvaluation of India’s currency adversely impacts the country’s exports by making them more expensive.
But “the sensitivity of India’s merchandise exports to real exchange rate changes seems to have come down over the years,” the RBI said in its monthly bulletin.
India’s merchandise exports grew by a compounded annual growth rate (CAGR) of 5.8% since April 2018, faster than the world’s average of 4%, the bulletin said.
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**Interview with Dr. Anjali Mehta, Economic Analyst**
**Editor:** Good afternoon, Dr. Mehta. Thank you for joining us today to discuss the Reserve Bank of India’s recent activities regarding foreign exchange.
**Dr. Mehta:** Thank you for having me. It’s a pleasure to be here.
**Editor:** Let’s dive right in. The Reserve Bank of India reported a net purchase of $9.6 billion in September, marking the highest monthly purchase in six months. What does this indicate about the RBI’s strategy?
**Dr. Mehta:** This significant purchase highlights the RBI’s proactive approach to managing the Indian rupee’s value in the foreign exchange market. By absorbing dollar inflows, particularly those linked to local stocks and bonds, the RBI aims to prevent excessive appreciation of the rupee, which could negatively impact exporters and overall economic competitiveness.
**Editor:** Interesting. This intervention seems aligned with their broader goal to cap excess volatility. However, how has the rupee been performing in this context?
**Dr. Mehta:** In September, the rupee appreciated slightly by about 0.1%, largely due to a positive risk sentiment following the U.S. Federal Reserve’s 50 basis point rate cut. However, the RBI’s absorption of dollar flows kept the rupee within a tight range, moving between 83.7 and 83.8 against the dollar. This stability is crucial for maintaining confidence among investors.
**Editor:** Speaking of confidence, you mentioned earlier the RBI’s foreign exchange reserves reaching a record high of $704.89 billion. What implications does this have for India’s financial position?
**Dr. Mehta:** A robust reserve position strengthens the RBI’s capability to intervene in the market effectively and provides a buffer against external shocks. It enhances India’s global standing and signals to investors that the country can withstand financial volatility. However, it’s essential to recognize that while high reserves are beneficial, the real effective exchange rate indicates that the rupee could be overvalued by about 7.21%, which brings its own set of challenges.
**Editor:** Indeed, that overvaluation against the currencies of India’s trading partners is noteworthy. What do you see as the potential long-term effects of the RBI’s interventions?
**Dr. Mehta:** While the immediate goal is to stabilize the currency, prolonged intervention may lead to distortions in the market, making it harder for the currency to find its fair value over time. It’s a balancing act: the RBI must support stability without fostering long-term dependency on interventions, which can ultimately harm economic growth and export competitiveness.
**Editor:** Thank you, Dr. Mehta, for your insights. It’s clear the RBI’s actions are pivotal to India’s economic landscape, and we appreciate your expertise on this matter.
**Dr. Mehta:** Thank you! It’s vital we keep discussing these issues, as they have far-reaching implications for India’s economic health.
