Context:
In the fiscal year 2022-23, the Reserve Bank of India (RBI) experienced a notable change in its foreign exchange dealings. After acting as a net purchaser of the US dollar for three consecutive years, the RBI transitioned into a net seller, with a sale of 25.52 billion USD in the spot market.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- How did the RBI Turn into a Net Seller in FY23?
- Other Measures to Curb Depreciation of Rupee
How did the RBI Turn into a Net Seller in FY23?
The Reserve Bank of India (RBI) shifted to becoming a net seller of foreign exchange in FY23 due to several factors and considerations:
- Stabilizing the Rupee: The RBI’s primary objective is to maintain stability in the movement of the Indian rupee. By intervening in the foreign exchange market, the RBI aims to prevent excessive volatility and sharp depreciation of the rupee.
- Impact on Profit and Dividend Payouts: The sale or purchase of dollars by the RBI affects its profit. The profits generated from these transactions are reflected in dividend payouts to the Indian government.
- Preventing Rupee Weakness: Experts believe that without the RBI’s dollar sales, the rupee could have further weakened, potentially reaching levels as low as 84-85 against the US dollar.
- Decrease in Foreign Exchange Reserves: During FY23, the country’s foreign exchange reserves declined from $606.475 billion to $578.449 billion. This decrease was primarily due to valuation losses resulting from the appreciation of the US dollar and higher US bond yields.
- Countering Global Developments: The RBI sold significant amounts of dollars in FY23 to counter the depreciation of the rupee caused by the Ukraine-Russia conflict and the interest rate hikes implemented by the US Federal Reserve.
- Rupee Depreciation: The rupee experienced a depreciation of approximately 8% during FY23. The RBI’s intervention helped prevent further weakening of the currency.
- Rupee Movement: From April 1, 2022, to March 31, 2023, the rupee declined from around 76 levels to nearly 82 against the US dollar.
- Profit and Dividend Payouts: The RBI’s dollar sales in FY23 resulted in significant profits, leading to a higher dividend payout to the Indian government. The Central Board of the RBI approved a 188% increase in surplus transfer to the government for the accounting year 2022-23.
Other Measures to Curb Depreciation of Rupee
To curb the depreciation of the rupee, several measures can be considered:
- Increase Capital Flows: Encouraging foreign investments and attracting Non-resident Indian (NRI) deposits can help increase capital inflows into the country, boosting the availability of foreign currency.
- Monitor and Intervene in Foreign Exchange Markets: The central bank can actively monitor and intervene in the foreign exchange markets to reduce excessive volatility and smooth out fluctuations in the rupee’s value.
- Selective Use of Foreign Exchange Reserves: Foreign exchange reserves can be utilized selectively to counter excessive depreciation, ensuring stability in the currency’s value.
- Foster Favorable Business Environment and Policies: Creating a favorable business environment and implementing policies that support economic growth and exports can help strengthen the overall economy and reduce pressure on the rupee.
- Strengthen Monetary Policy Frameworks: Robust monetary policy frameworks that effectively manage inflation and maintain stability can contribute to curbing the depreciation of the rupee.
- Enhanced Coordination: Collaborating with other relevant government agencies to implement comprehensive strategies for managing currency depreciation can lead to more coordinated and effective interventions.
- Promote Trade in Rupees: Encouraging trade transactions to be conducted in rupees and promoting the use of the domestic currency for pricing India’s trade can reduce dependence on foreign currencies and mitigate depreciation risks.
- Continuous Monitoring and Assessment: Regular monitoring and assessment of the impact of policy measures on the rupee’s depreciation is crucial. Adjustments can be made as necessary to ensure the effectiveness of the measures implemented.
-Source: Indian Express
