NEW DELHI: In a bid to keep the rupee value stable and encourage India’s flagging exports, the Centre has been encouraging the Reserve Bank of India (RBI) to continue with its policy of buying dollars aggressively.
“We are supportive of RBI’s stance to buy dollars. This helps keep the rupee value stable and not push it up, given the huge forex inflows into India. A rise in rupee value would obviously hit our exports adversely,” said top finance ministry officials.
The RBI, of course, did not pick the intervention route to help exporters, but its aim was to sanitise the huge foreign exchange flows.
The RBI has had a problem of plenty since the pandemic played out — its forex reserves has swelled to nearly $ 575 billion, compared to a tad over $474 billion at the start of the financial year.
Most of the money India has added to its forex reserves has come in the form of short term flows into its equities market or as debt for its corporates and not from excess of export income over imports.
Foreign firms buying Indian equities have spent over $ 40 billion in the last 8 months pushing up the Sensex to new heights. After slipping to below 26,000 in March, the BSE stock market index has risen to way above the 45,000 mark.
Debt inflows have also been robust with corporates searching for low cost loans to replace the costlier Indian debt they have borrowed abroad liberally.
Consequently, the central bank has been quietly buying dollars which has helped the rupee value remain stable.
The Indian currency to the dollar is around Rs 73.80 now, compared to Rs 75.42 on March-end, this year.
“Any central bank would follow such a policy. However, there are limits to being able to stave off a rise in the value of your currency by buying other hard currencies. At some stage the market can gain the power to beat off such interventions,” said Sanjay Bhattarayya, former managing director of SBI.
Some $10 trillion plus of new money have been issued by G20 central banks to tide over the Covid crisis.
This could swirl through the global money market and eventually head towards emerging market economies which offer better returns compared to Western banks.
“If more short term funds flowed into India, we would have trouble. The rupee could strengthen making us more uncompetitive compared to peers,” admitted North bloc officials.