The Centre and the Reserve Bank of India (RBI) have been taking steps to attract capital inflows so the rupee’s depreciation against the dollar is smooth and gradual, government officials said. They pointed out that the dollar has strengthened against other currencies too, as global investors have become cautious, and the weakening of the rupee isn’t due to any problems with the Indian economy.
“The strength of the US dollar against the Indian rupee cannot be viewed as an isolated case,” said one official. “It is just part of the strength of the US dollar globally, against all currencies – developed or emerging.” They added that the Dollar Index has gained 13% this year against six major currencies – euro, pound, yen, Swiss franc, Canadian dollar and Swedish krona.
In contrast, the US currency has gained less against the rupee, which has gone from 74.5 per dollar at the end of 2021 to 79.74 at the end of June, about a 7% depreciation.
As a result, the rupee has strengthened against the euro, the yen, and the pound, among others, of late. The rupee was little changed on Friday at 79.88 per dollar, ranking as the fifth best performing Asian currency. The local unit has shed nearly 7.5% in six months.
Foreign investment outflow was a key reason for rupee depreciation, officials said.
The officials pointed to the nearly $31.5 billion pulled out between the beginning of FY22 and July 15.
“In February, the conflict in Ukraine broke out. That raised the price of oil and also raised uncertainty. On account of both these reasons, investors turned cautious,” said the official cited above. “When they become cautious, they begin pulling money out of emerging markets like India.” The US Federal Reserve’s monetary tightening too has pushed overseas investors to withdraw from emerging markets. The rise in the price of crude oil has also pushed up India’s import bill this year, from last year. Officials also pointed out that in the earlier instance of sharp currency movements, the dollar appreciated more against the rupee – in 2008 and in mid-2013 by 28% each, and 22% in 1997-98.
Officials added that RBI is closely monitoring the foreign exchange market and is using its reserves when needed. This continues to be at comfortable levels despite the interventions.