“I would like to reiterate that we have no particular level of the rupee in mind, but we would like to ensure its orderly evolution, and we have zero tolerance for volatile and bumpy movements,” the governor said. “We will continue to engage with the forex market and ensure that the rupee finds its level in line with its fundamentals.”
Das said the rupee’s movement has been relatively smooth and orderly largely because of the RBI’s actions over the last few weeks.
“In recognition of the fact that there is a genuine shortfall of supply of forex in the market relative to demand because of import and debt servicing requirements and portfolio outflows, the RBI has been supplying US dollars to the market to ensure that there is adequate forex liquidity,” he said.
‘Fundamentals are Strong’
“After all, this is the very purpose for which we had accumulated reserves when the capital inflows were strong. And, may I add, you buy an umbrella to use when it rains,” Das added. This year, the rupee has fallen about 8% to breach the 80 to the dollar mark amid an unprecedented surge in the world’s reserve currencies. To be sure, the rupee has fared relatively better than some competing units despite the global rush for dollar-backed assets.
Das said it’s important to recognise that spillovers from global monetary policy tightening, the geopolitical situation, elevated commodity prices-especially that of crude-and the lingering effects of the pandemic have become overwhelming for all countries.
“The Indian rupee is holding up well relative to both advanced and EME (emerging market economy) peers,” Das said. “This is because our underlying fundamentals are strong, resilient and intact. The recovery is gradually strengthening. The current account deficit is modest. Inflation is stabilising. The financial sector is well-capitalised and sound. The external debt to GDP ratio is declining. The foreign exchange reserves are adequate.”
The RBI governor also said that the unhedged portion of the overseas borrowings of Indian companies, including state-owned entities, is a lot less than what the data on the surface conveys, as most companies have a natural hedge and don’t pose any threat.
“Besides, being public sector entities, their foreign exchange risk, if any, can be absorbed by the government,” Das said. “The remaining $39 billion ECB (external commercial borrowing) represents 22% of the total ECBs outstanding. Even this includes borrowings of those companies which have a natural hedge. This would leave a very small portion of the total outstanding ECBs that is truly unhedged. For India, our internal research estimates the optimal hedging ratio at 63%.”
Das also said that inflation appears to have peaked.
“Please mind my words–it has appeared to have peaked and it has moderated from 7.8%–it came down to 7.04% and now it is 7.0%,” he said. “So, it’s a very volatile situation.” The RBI is mandated to keep consumer inflation at 4%, with a tolerance band of two percentage points on either side.
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