The Indian rupee touched yet another all-time low of 83.36 against the US dollar on Friday, as Asian markets got dragged down by losses in China. On the other hand, the dollar index that gauges the greenback’s strength against a basket of six currencies maintained poise after staging its biggest rally in September. After being the worst-performing Asian currency in 2022, the rupee has touched a series of lows this year. But it has remained in the 81-83 band, thanks to the RBI’s aggressive and timely intervention selling dollars in the forex market. Notwithstanding the new lows, the rupee is down by just 0.6 per cent against the dollar in the year to October 31 and has emerged as one of the better-performing emerging market currencies, led by improved growth prospects, healthy capital inflows and lower oil prices.
Amid an anticipated reversal of capital flows next year, the RBI’s interventions will likely reduce. Rupee movements should stabilise if oil prices behave. Currency volatility is an important metric not only for global investors but also for domestic importers impacted by our external and fiscal deficits. India is making sincere attempts to arrest rupee fluctuation, though the outcome has been less than desired. Its latest efforts include increasing rupee usage in global trade and cross-border transactions, effectively reducing the reliance on a third currency like the dollar. To move towards this, the RBI allowed banks from 18 countries including Germany, the UK and Singapore to settle payments in rupee earlier this year. But such transactions have unfortunately been limited. Efforts should be made to increase these transactions and expand the list of countries so that the average daily share of the rupee in the global forex market scales higher from the current 1.6 per cent.
The rupee is not fully convertible now and India should aim for it, as it would allow freer movement of investment. On the other hand, full convertibility would raise risks as our financial system is not yet adequately secured from external shocks or geopolitical pressures. That said, greater internationalisation of the rupee would help stabilise exchange rate volatility. It would reduce transaction costs for businesses and the need to maintain high forex reserves. It would also enhance India’s geopolitical influence and strengthen trade ties. For that to happen, we must upgrade the financial markets, ensure a stable regulatory environment and increase export competitiveness.