Table of Contents
- 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?
- Boost Exports and cover for Imports.
- Curb Volatility in currency market.
- Increase rupee liquidity.
This has led to a major problem- Inflation
- 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.
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