Strengthening of US Dollar, RBI Interventions Guiding Rupee Movement - India Ratings

New Delhi, January 9, 2015: The movement in the rupee value is not in line with improvements in the fundamentals of Indian economy, says India Ratings & Research (Ind-Ra). The twin deficits are no longer a threat to macroeconomic stability, as inflation is following the glide path. Also, capital inflow is in excess of the requirements to fund current account deficit. The economy is thus likely to achieve 5.6% growth in FY15. 

The rupee should have been either stable or appreciated; however, it depreciated 3.3% between January-December 2014. Yet the currency has performed better than other currencies. Currencies of most economies have depreciated more than the rupee. 

Unprecedented strength of the US dollar is one of the two major reasons behind the movement of rupee in 2014. Broad US dollar index (BUSDI) appreciated 7.4% between January-December 2014. BUSDI for December 2014 (110.4) is at 69 months high. Although the monetary policies followed by a country have significant bearing on the value of its currency in relation to US dollar, in a globalised world, a lot depends on the overall strength/weakness of US dollar. Economic fundamentals of both India and the US have improved over the last one year. However, BUSDI has gained strength on account of (i) robust recovery in the US economy, (ii) withdrawal of quantitative easing by the US Fed and (iii) continuation of the easy monetary policy followed elsewhere including Japan and euro zone. 

Reserve Bank of India’s (RBI) intervention in the currency market is the other main factor affecting the value of rupee. During the times of weakness, RBI sells dollar in the currency market. However, it made a net purchase of USD19.4bn to arrest rupee appreciation during April-October 2014. RBI is also focusing on Consumer Price Index based real effective exchange rate instead of nominal effective exchange rate. According to the new approach, the fair value of rupee is estimated to range between INR61-62/USD, i.e. at depreciated levels. 

(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research-A Fitch Group Company, Mimbai.)

 

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