How Rupee Value Is Rising With Help From RBI

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Despite Dollar Index falling from 103 to 93 levels, FDI inflows worth $22 billion and nearly $8 billion FII inflows in the Indian capital market,
RBI has not allowed the rupee to appreciate below 74 in last 3 months with continuous dollar buying.

The RBI has so far been absorbing the capital flows to prevent the appreciation of the currency,
Taking foreign exchange reserves to a record high which the Bank of America forecasts to touch 550 billion dollars.

Why RBI did this?

Inflation has been above the target prescribed by law to the Monetary Policy Committee.
Given the price pressures, the market has been demanding that interest rates be pushed higher.
But given its constraints on the monetary policy side, where it has to keep interest rates low to give a fillip to economic activity crippled by Covid-19,
It cannot raise interest rates to fight inflation.
So, RBI has found a tool in currency.

In a note announcing the `Measures to Foster Orderly Market Conditions’,
The central bank has slipped in a message that it is worried about inflation and it won’t hesitate to use measures other than interest rates to fight price pressures.
“The recent appreciation of the rupee is working toward containing imported inflationary pressures,’’ said RBI in the note.
When the central bank openly accepts that currency appreciation is helping achieve one of its key goals of inflation management when its hands are tied,
It is an acknowledgement that the objective of currency operations has evolved beyond just tempering the volatility.