: Opinion: On a weak ‘note’ #IndiaNEWS #News By Dr Seela Subba Rao A heavy outflow in foreign funds from the domestic market is one of the reasons for the depreciation of the Indian rupee. Whenever

Opinion: On a weak ‘note’ #IndiaNEWS #News
By Dr Seela Subba Rao
A heavy outflow in foreign funds from the domestic market is one of the reasons for the depreciation of the Indian rupee. Whenever the value of a currency falls, it badly impacts that nation’s economy and results in a higher rate of inflation. The demand for a currency is driven by the nation’s total imports and exports. For example, if India imports more than it exports, it raises the demand for US dollar oversupply thus resulting in a fall in the value of the rupee against the dollar.
Various factors such as inflation, interest rates, quantum of public debt and current account deficit influence the dollar-rupee exchange rate to a great extent. Political instability too matters.
Rupee depreciation, ie, decrease in the value of the rupee against the dollar, influences the current account deficit. It also puts inflationary pressures but at the same time, exports become more remunerative. Similarly, when the rupee appreciates vis-à-vis the dollar, it means the goods of our nation are more expensive, so exports will reduce.
If a country imports more than its exports, then the demand for the dollar will be higher than the supply and the rupee will depreciate.
Forex Reserves
The Reserve Bank of India (RBI)’s intervention and the dollar/rupee exchange rate are interconnected. It is pertinent to know who the market players are and how the RBI regulates them. The market players are only banks licensed by the RBI and the RBI itself. Individuals and corporates cannot enter the market. They can only deal with their respective banks. Therefore, being the regulator, the RBI dominates the market, the player and the jury. Thus, it is facile to argue that the dollar/rupee rate is ‘market determined’ and the RBI has no role in it.
Section 40 of the RBI Act, 1934, (Transactions in foreign exchange) stipulates that the Central government orders the “rate??? at which the RBI shall buy or sell forex to banks (authorised persons). This “rate???, in turn, will be governed by India’s obligations to the International Monetary Fund (IMF). The dollar/rupee rate has thus been subjugated to the IMF, which is dominated by the United States from the good old days.
All the players (banks) are required to be square or near square (closing a position) in their forex positions (spot or forward) at the close of business hours each day. This ‘overnight limit’ is prescribed for each bank by the RBI. Even during the day, the prescribed ‘daylight limit’ cannot be breached. These limits are enforced by the RBI strictly.
For example, on a particular day, the RBI sells (intervenes) billion in the market and one bank buys these dollars to remit them abroad for an importer (goods/services) customer.

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