RBI's actions may help rupee outperform other emerging market currencies

7 Jul 2022 , 09:14 AM

Experts predicted that the plethora of actions taken by the Reserve Bank of India (RBI) on Wednesday (06-07-2022) to increase foreign exchange inflows would help the rupee outperform its rivals in emerging market nations. 

According to the RBI, it has been attentively and continually monitoring the liquidity circumstances in the foreign exchange market and has intervened as needed in each of its segments to ease the dollar’s tightness with the aim of guaranteeing the orderly operation of the market.

CEO of IFA Global Abhishek Goenka summarised RBI’s most recent initiatives as an effort to increase short-term dollar inflows. According to Vivek Kumar, an economist at QuantEco Research, the central bank has changed its defense strategy by including macroprudential measures to promote foreign inflows in response to the rupee’s ongoing pressure.

“We think that the rupee will continue to do better than its counterparts in developing market nations. However, it is unlikely to alter the unfavorable global environment, which includes a strong currency, increased geopolitical unpredictability, and still fairly high commodity prices “added he.

 Following a steep drop in crude oil prices, FIIs reallocating in the capital markets, and significant gains in domestic equities, the rupee jumped 39 paise on Wednesday, its greatest single-day gain in more than three months, to settle at 78.94 versus the US dollar.

To increase foreign exchange inflows, it unveiled five steps. According to the RBI, the depreciation of the Indian rupee versus the US dollar during the current fiscal year (up to July 5) has been low compared to other EMEs and even large Advanced Economies (AEs).

“We think that the rupee will continue to do better than its counterparts in developing market nations. However, it is unlikely to alter the unfavorable global environment, which includes a strong currency, increased geopolitical unpredictability, and still fairly high commodity prices ” he added. 

The steps would have a favorable emotional impact in the near term but will have a marginally beneficial impact over the medium term, according to Dilip Parmar, Research Analyst at HDFC Securities, commenting on the RBI’s decision. However, Parmar noted that in order for dollar inflows to be sustained, both domestically and globally stable growth and inflation were required.