The Indian rupee has depreciated almost 9% in the current fiscal year. Not only INR which is facing this depreciation, but also many currencies from the emerging market are struggling against the US dollar. The good news in this worst-case scenario is that the INR is performing better than other peer currencies. The rupee's relatively decent performance comes at the expense of our foreign exchange reserves. It implies that the RBI has sold around $109 billion in the foreign exchange market to support the rupee. The RBI's foreign currency reserve stood at $642.45 billion in September 2021 and fell to $532.66 billion in September 2022. When the RBI sells dollars in exchange for INR, the liquidity of the INR in the domestic market decreases. When the demand for INR rises and supply falls, the currency's value rises. What are the forthcoming challenges in front of the rupee? Ongoing hikes in interest rates by several central banks in developed countries to control inflation. This leads to capital outflow mainly in the form of FPI. Supply chains are being hit by the Russia- Ukraine war, and another geopolitical risk. The widening current and trade account deficit. High crude oil prices. Fear of impending recession etc. What can be beneficial for the rupee? India is still one of the top choices for foreign investors due to its higher economic growth rate. The government has come up with new arrangements for payments like the ‘vostro account’ which will decrease the need for dollars for the settlement of trade payments. Will RBI be able to support INR further by selling the dollar? India has the fifth-largest foreign exchange reserve in the world. But when we compare it to india's obligation towards payment obligation it is not sufficient. Also, RBI’s primary function is to stabilize the price level in the economy. RBI has adopted a managed exchange rate system, which means RBI will not fix the value of the rupee unless an extreme scenario occurs. One important thing is having a good amount of forex builds confidence, it ensures that domestic companies can continue to import and export competitively. The rupee's future direction may change in response to underlying global and domestic causes. Both the government and the central bank should regularly reassure the market that the rupee would be supported by conducting a limited intervention. Thank you.
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