INR’s fall versus USD lower in 2022 compared to other currencies

To reduce dominance of dollar, RBI announced a mechanism to settle payments for international trade in rupees

NEW DELHI: Amid the ‘hue and cry’ by the Opposition leaders over the strengthening of the US dollar against Indian Rupees, a government official has claimed that the extent of fall in the value of the rupee versus the US dollar has been lower in 2022 as compared to other major currencies.

Claiming that the strength of the US dollar against the Indian rupee cannot be viewed as an isolated case, the official stated that the US dollar index against six major currencies – Euro, British pound, Japanese yen, Swiss franc, Canadian dollar, and the Swedish krona – has gained 13 per cent this year.

Citing the global concerns that led to dollar appreciating against the Indian rupee, the official said that the strength of the US dollar is due to the change in attitude towards risk taking in financial markets.

“When interest rates are low and dollar supply is ample, investors take risks. They invest in the stock markets of emerging economies like India. Indian stock markets gained a lot in 2020 and 2021 due to the willingness to take risks on the part of international investors,” the official said, adding that aggressive monetary policy tightening by the US Federal Reserve and high crude oil prices due to the war in Eastern Europe played a key role in the dollar appreciating against the Indian rupee.

“The Indian rupee has witnessed a steady and consistent depreciation against the US dollar with multiple all-time lows in 2022 as the US dollar has strengthened by about 7 per cent in the course of 2022,” the official said.

“The conflict in Ukraine in February raised the prices of crude oil and subsequent demand for additional dollars. The war has led to further economic uncertainty. On account of these factors, foreign investors turned cautious and began pulling money out of emerging markets like India,” the official said, adding that foreign investors have pulled out nearly $31.5 billion since the beginning of 2021-22 to July 15, 2022.

The silver lining this time is that the appreciation of the US dollar was much less than in the ‘taper tantrum’ of 2013, the global financial crisis of 2008, and the Asian financial crisis of 1997-98, the official said.

“In 2013, between May 3 and August 28, the US dollar strengthened from 53.65 to 68.80 rupees, a 28 per cent appreciation, and in 2008, from February to October, the US dollar had strengthened from Rs 39.12 to Rs 49.96, another 28 per cent rise. Between August 1997 and August 1998, the US dollar strengthened 22 per cent against the Indian rupee,” the official added.

The government and the Reserve Bank of India (RBI) have been taking steps to attract dollar inflows, to make appreciation of the dollar against the Indian rupee more gradual and smoother, the official said.

“The Reserve Bank of India regularly monitors the foreign exchange market and intervenes in situations of undue volatility. For its interventions, it uses its foreign exchange reserves which continue to be at comfortable levels,” said the official.

To reduce the dominance of the dollar, the RBI announced a mechanism to settle payments for international trade in rupees, especially the country’s exports on July 6.

Banks are also being allowed to offer higher interest rates on fresh Foreign Currency NonResident Bank and Non-Residential External deposits than those on comparable domestic term deposits for the period up to October 31, 2022 to attract more of such deposits.

Further, the government in early July imposed a windfall tax on domestic crude oil producers, imposed export duties on petrol, diesel, and aviation turbine fuel, besides hiking the import duty on gold in an effort to reduce pressure on the rupee.