Why Weaker Rupee Isn’t All Bad News

Depreciation helps exports and selling reserves is not a sustainable strategy

- Rajeswari Sengupta

As the exchange rate breached the 80-mark, some observers argued that this can be managed easily, since India can simply sell a portion of its foreign exchange war chest, which amounts to a healthy $580 billion.

Unfortunately, currency management is not that simple. In fact, it is not obvious that dollar sales will be sufficient to resolve the exchange rate pressure – or even whether preventing depreciation is the right strategy for the economy at present.

What is the real problem with rupee?

● Rupee is under pressure because US Federal Reserve has begun to fight inflation by aggressively raising interest rates. When Fed raises interest rates, global investor funds shift their portfolio allocations towards US financial markets.

● In India’s case, the net sales of foreign portfolio investors have amounted to a sizeable $31 billion in 2022 so far, according to data from NSDL.

● Also note that the dollar has appreciated across currencies. The dollar index has strengthened against its trading partners by more than 11% this calendar year, reaching levels last seen in 2002.

● The counterpart to this appreciation has been a depreciation of the pound sterling, the euro, and nearly all emerging market (EM) currencies. In the case of rupee, the depreciation has amounted to a relatively modest 7% since January 2022.