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India has lost two thirds of its dollar warchest in protecting the rupee

India has lost two thirds of its dollar warchest in protecting the rupee

India has lost two thirds of its dollar warchest in protecting the rupee
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By Sriram Iyer  Sept 30, 2022 8:32:13 PM IST (Updated)

While the Indian central bank has promised to play its part in keeping the currency stable, the governor warned that rupee is a freely floating currency and the exchange rates are determined by the market. The RBI also added that it would step in (and buy or sell dollars) only if there is heightened volatility.

The Indian rupee has fared better than many other currencies but it has cost the Reserve Bank of India (RBI) more than two-thirds of its warchest in defending it, Governor Shaktikanta Das in the briefing after the monetary policy meeting said. India’s forex reserves now stand at $537.5 billion as of Sep 23, lowest in over 25 months.

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“The underlying strength of the economy and the buffers built over the years have held us in good stead,” Governor Das said in his monetary policy statement, which included a 50 basis point hike in interest rates. The rupee has depreciated by 7.4 percent against the US dollar between March 2022 and September 28.
While the Indian central bank has promised to play its part in keeping the currency stable, the governor warned that rupee is a freely floating currency and the exchange rates are determined by the market.
The RBI said it would step in (and buy or sell dollars) only if there is heightened volatility. The rise in India’s imports has been rising much faster than exports, taking the country’s current account deficit – the net outflow of foreign exchange from the country – to its highest in 15 quarters.
The governor hopes that India’s services exports, nearly half of which is software, will offset some of the trade deficit (the excess of imports over exports). Foreign direct investment, which is another important component, in reducing deficit and easing the pressure on the rupee, has also fallen.
While the government has said that it is confident that $100 billion of foreign direct investment will eventually enter the country before March 2023, data shows that the net FDI was $16.58 billion between April and June 2022, down 6 percent compared to the last year.
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