Control interest rates to check rupee volatility
The Indian currency is on the edge yet again. After appreciating for most of 2023, the rupee began depreciating this month, slipping below the psychological level of 83 against the US dollar. On Friday, it fell ahead of the Jackson Hole symposium, where the US Federal Reserve Chairman will likely maintain a hawkish tone, extending further gains for the greenback. As it is, the domestic unit has been bogged down by a strong dollar, persistent foreign capital outflows, rising global crude oil prices and inflation. The dollar index, which gauges the greenback’s strength against a basket of six currencies, inched up to 104 -- the highest since June 8, and the RBI, which has been intervening in the market selling dollars to prevent further slide, appears ready to act with its $600-odd billion forex reserves in tow.
So far, the government is unfazed by the rupee movement, terming exchange rate volatility as nothing abnormal and is keeping its faith in the RBI to counter the currency rout. Earlier this month, the rupee hit an all-time intra-day low of 83.16, the lowest since October 20, 2022, when it touched 83.29. But that’s the fate shared by most Asian currencies, and traders are mentally preparing themselves to withstand an INR level of 86. The widening gap between US-India interest rates offers meatier returns on dollar assets than emerging markets, and predictably, companies are gravitating towards advanced economies. As demand for dollars increases, the value of the rupee depreciates, a prospect an import-dependent country like India would prefer to avoid as it leads to high raw material costs and production costs for domestic companies. While weakening currency boosts exports, exporters are not enthused given the subdued global demand.
As an RBI-appointed committee noted last month the rupee has the potential to become an international currency, and higher usage in invoicing and settlement of international trade and capital account transactions will give the domestic unit a progressively international presence. But the committee also warned that the rupee’s internationalisation might lead to potentially increased volatility and accentuate an external shock, given the open channel of the flow of funds into and out of the country and from one currency to another. Efforts should be made to strengthen the rupee’s value against the dollar steadily and control interest rates to prevent volatility.