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RBI draws up plans to stem Rupee slide - Views on News from Equitymaster
 
 
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  • Aug 24, 1999

    RBI draws up plans to stem Rupee slide

    After having largely stayed away from forex markets, and thus implicitly permitting the fall in value of the Indian Rupee, the Reserve Bank of India has come out with concrete plans to stem this exchange depreciation. The RBI believes this is a result of 'temporary demand supply gaps'.

    The latest round of depreciation in the value of the Indian Rupee has been the result of:

    • a higher oil import bill on account of a surge in global oil prices
    • the government's larger dollar debt servicing costs
    • lower foreign institutional inflow over the last fortnight
    • the decision to suspend all loans to India, for non-essential purposes, by the Group of 8 nations

    The Reserve Bank of India has decided to meet the government's debt service payment and the oil import bill requirements directly, without going to the markets. This will temper down the volatility in the value of Indian Rupee, as demand-supply gaps in the markets will be reduced.

    A look at the graph reveals that after having stabilised at an exchange rate of Rs 43.42 per US$, the Indian rupee plunged to Rs 43.55 per US$ within two trading sessions. This period also coincided with a correction in the stock markets. The fall was precipitated by the imposition of sanctions by the Group of 8 nations.

    The Rupee recovered after the RBI entered the markets. Also the RBI Governor's positive statements regarding the value of the Indian Rupee helped stem the sharp exchange rate depreciation.

    The value of the Indian Rupee is likely to stabilise at current levels if the RBI carries out its plans to fund the demand for dollars directly. This is however only stop gap measure to temporarily reduce the volatility in the markets. Unless the factors mentioned above are not taken care of, the Indian rupee is likely to again come under pressure in the future.

     

     

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