Center steps in to cushion Re’s fall and boost dollar inflows

As the rupiah weakens to historic lows and the RBI reportedly kept it from falling below 80 against the US dollar last week, government sources said the Center and the Reserve Bank took measures to attract dollar inflows and cause the dollar to appreciate against the US dollar. more progressive and smoother rupee.

The US dollar has strengthened not only against the Indian rupee but also against many other major currencies, an official said, adding that this year the rupee has strengthened against the euro, to the Japanese yen and the pound sterling. “Even though the strength of the US dollar against the Indian rupee has been quite subdued, the Indian government and central bank have taken steps to attract dollar inflows, to make the appreciation of the dollar against the Indian rupee more gradual and smoother,” said a government official.

Foreign exchange, or forex, reserves fell by $8.06 billion to $580.02 billion in the week ended July 8, on the back of the appreciation of the dollar and capital outflows from the India, triggered by rising inflation and rate hikes in the United States.

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Impact of cash outflows

Foreign investors withdrawing funds from Indian markets – Rs 2.24 lakh crore in equity and Rs 15,749 crore in debt since January – have put heavy pressure on the rupee as well as the forex kitty.

With this, foreign exchange reserves plunged by $62.4 billion from the all-time high of $642.45 billion on September 3, 2021. One of the main reasons for the drop in foreign reserves is the outflows of capital from foreign portfolio investors (REITs) as the US Federal Reserve initiated monetary policy. monetary policy tightening and interest rate hikes.

As the value of the rupee fell to 79.88 against the dollar on Friday, the RBI reportedly prevented the national currency from falling below 80 by selling dollars over the past two days.

Government sources said that the Reserve Bank of India (RBI) regularly monitors the foreign exchange market and intervenes in situations of excessive volatility. “For its interventions, it uses its foreign exchange reserves which remain at comfortable levels,” said an official source.

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The increase in the inflation rate in the United States and in the developed countries prompted their central banks to react by raising interest rates in March. The war in Ukraine has raised oil prices and uncertainty. “For these two reasons, investors have become cautious. When they become cautious, they start withdrawing money from emerging markets like India. Foreign investors withdrew nearly $31.5 billion in total from the start of FY22 through July 15, 2022-23,” the source said.

Rising oil prices have pushed up India’s import bill this year, which has also implied greater demand for US dollars to pay for crude oil, the person added.

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