Rupee Slide: Panic Is No Policy, Pg16

Key Highlights:

• The Indian Rupee depreciated by almost 7% in the last 12 months, falling from 88.84 to 94.95 against the US dollar.
• The Reserve Bank of India (RBI) proposed drastic measures under the Liberalised Remittance Scheme (LRS) to control dollar outflows.
• Proposed LRS changes include disallowing resident individuals from buying foreign real estate and shares, and reducing the current account transaction limit to $50,000 from $250,000 annually.
• The government advised citizens to reduce fuel consumption, avoid gold purchases, and postpone overseas travel to conserve dollars.
• RBI sold an estimated $75-80 billion between June and October to defend the rupee and hiked policy rates.

Rupee Depreciation.jpg

Detailed Insights:

• Rupee depreciation significantly increases the cost of imports, such as crude oil and gold, and makes foreign travel and education more expensive.
• Global financial instability, driven by high crude oil prices exceeding $115 a barrel and ongoing geopolitical conflicts, contributes to the rupee's fall.
• Rising US government borrowing leads to higher US bond yields, making the US dollar more attractive and drawing capital away from emerging markets.
• The yield difference between 10-year US bonds (around 5%) and Government of India bonds (around 7.5%) is at a two-decade low.
• India's macroeconomic fundamentals are robust with strong growth and controlled inflation, but concerns persist regarding private sector investment and job creation.
• India's foreign exchange reserves stand at a comfortable $720 billion, despite significant dollar sales by the RBI to stabilize the currency.
• The RBI also increased key policy rates, aiming to make rupee-denominated assets more appealing to foreign investors.

Key Concepts Involved:

• Liberalised Remittance Scheme (LRS): A facility allowing resident individuals to remit money abroad for various permissible current and capital account transactions up to a specified limit.
• Foreign Exchange Reserves: Assets held by a central bank in foreign currencies, used to back liabilities, influence monetary policy, and manage exchange rates.
• Foreign Direct Investment (FDI): An investment made by a firm or individual in one country into business interests located in another country.
• Foreign Portfolio Investment (FPI): Investment by foreign entities in financial assets like stocks and bonds in a foreign country, without gaining control of the company.