Summary of this article
Rupee movements driven by global and domestic factors
RBI intervenes only to curb excessive currency volatility
Import dependence increases demand for US dollar payments
Union Minister of Finance Nirmala Sitharaman has said that fluctuations in the rupee against the dollar is due to a multitude of international and domestic factors, including geopolitical turmoil, movements in foreign capitals, and India’s dependence on imports of crude oil, fertilisers, and gold.
The Reserve Bank of India (RBI) intervenes in the foreign exchange market only to manage excessive volatility and not to maintain a fixed exchange rate, she said.
RBI Steps In To Manage Currency Volatility
At a media interaction she said that RBI intervenes only when there is significant fluctuation in the rupee that could otherwise disrupt the financial stability of the country. The central bank uses foreign exchange (forex) reserves to ease out excessive movements in the currency market, and exits once conditions stabilise. The intervention is aimed at reducing volatility rather than defending a particular exchange rate, she added.
The RBI does not seek to fix the value of the rupee and deploys its reserves sparingly to maintain orderly market conditions, she said.
Global Developments' Influence On Exchange Rates
She said that exchange rates are shaped by a range of international developments, including monetary policy decisions by the US Federal Reserve, geopolitical uncertainties, and movements in major global currencies.
She also pointed to fluctuations in currencies, such as the Japanese yen and South Korean won as examples of global developments that can influence currency markets across countries.
Foreign institutional investors (FIIs) and foreign direct investors moving funds in response to international developments can also contribute to changes in foreign exchange reserves and currency valuations, she added.
Import Requirements Create Dollar Demand
India’s dependence on imports of crude oil, fertilisers and gold requires substantial payments in dollars, making foreign exchange management important, she said. Large import bills for these commodities create significant demand for foreign currency and play a role in shaping the demand and supply dynamics of the rupee.
Referring to fertiliser imports, Sitharaman highlighted that international prices rose sharply after the Covid-19 pandemic, increasing import costs. Despite the rise in global prices, fertilisers continued to be supplied to farmers at Rs 300 per bag through government support.
She added that rupee movements are ultimately determined by a mix of global economic developments, capital flows, currency trends and domestic demand for foreign exchange.
