As Rupee faces choppy waters, what can the RBI do?

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The global economy is changing. The United States and other major economies are raising policy rates and shrinking their balance sheets in the face of unprecedented inflation. Factors such as the COVID-19 pandemic and the Russian-Ukrainian war, and the resulting sanctions and trade realignment, are putting pressure on currencies around the world.

The currency waters are choppy and the undercurrent for the rupee is quite weak. While our foreign exchange reserves are still quite healthy, the road ahead for the rupee looks dicey. The rupee is under serious pressure.

The RBI has three political objectives with internal contradictions.

Indian politicians like a “strong rupee”, which in practice implies that the nominal value of the rupee in terms of US dollars should appreciate or at least remain stable and not depreciate. Combined with political preference, the political objective of the RBI is therefore to keep the nominal value of the rupee stable, or if the rupee should appreciate or depreciate due to fundamental factors, to ensure that this happens. in an orderly and progressive manner.

Movements in foreign exchange reserves and rupee-dollar exchange rates have an impact on the domestic money supply, which, in turn, affects domestic prices and interest rates. For some time, the RBI has also been selling and buying dollars to increase profits for the distribution of surpluses to the government.

The contradictions inherent in these three objectives sometimes complicate the policy and actions of the RBI operationally. He currently does.

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