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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How does the RBI’s policy of managing volatility in the forex market affect the overall stability of the Indian economy?
**Interview with Dr. Anjali Verma, Financial Analyst**
**Editor:** Welcome, Dr. Verma! Thank you for joining us today to discuss the recent developments in India’s foreign exchange market and the Reserve Bank of India’s (RBI) actions.
**Dr. Verma:** Thank you for having me! It’s great to be here.
**Editor:** Let’s start with the RBI’s significant net purchase of $9.6 billion in September. What does this say about the current state of the rupee and the overall forex market?
**Dr. Verma:** The $9.6 billion purchase marks the highest monthly intervention by the RBI in six months, which suggests a proactive approach by the central bank to manage the pressures on the rupee amidst rising dollar inflows into local stocks and bonds. The RBI aims to prevent the rupee from appreciating excessively, which could negatively impact export competitiveness.
**Editor:** The rupee appreciated slightly in September, up by 0.1%. What factors contributed to this modest gain?
**Dr. Verma:** This small appreciation was primarily driven by a strong risk appetite following the US Federal Reserve’s decision to cut interest rates by 50 basis points. Nevertheless, despite the positive sentiment, the RBI’s continuous absorption of dollar inflows has kept the currency’s upward momentum limited, keeping it in a tight range around 83.7/$1.
**Editor:** Speaking of the RBI’s interventions, they have stated that they do not target specific currency levels but instead aim to cap volatility. How effective do you believe these interventions have been?
**Dr. Verma:** The RBI’s interventions have certainly been effective in stabilizing the rupee’s value and minimizing excessive fluctuations. However, there is a trade-off involved. The routine interventions are leading to an overvaluation of the rupee against the currencies of its trading partners. As of October, the rupee was overvalued by about 7.21% on a real effective exchange rate basis, which is concerning for India’s trade dynamics.
**Editor:** That’s an interesting point, Dr. Verma. With foreign exchange reserves hitting a record high of $704.89 billion, what outlook do you have for the RBI’s future policies?
**Dr. Verma:** The substantial reserves provide the RBI with a cushion to continue its interventions for the time being. However, they will need to balance their strategies carefully to support a stable environment while also maintaining competitiveness for Indian exports. The RBI’s future policies will likely focus on maintaining this stability and managing the effects of global economic shifts, particularly from major economies.
**Editor:** Thank you, Dr. Verma, for your insights on the RBI’s forex policies and the rupee’s current state. It’s clear that the dynamics of the forex market are closely tied to broader economic indicators.
**Dr. Verma:** Thank you! It’s always a pleasure to discuss these important issues.
