As rupee stares at 100 to a $, policymakers engage with a lesson from just three years ago, Pg1

Key Highlights:

• The Indian Rupee (INR) has fallen past 96 per dollar due to the ongoing West Asia crisis, reaching a new record low.
• Since late February, the rupee has depreciated by 5.2% against the dollar, raising concerns about breaching the 100 per dollar mark.
• Policymakers are concerned that the rupee's depreciation may negatively impact investor sentiment.
• The Reserve Bank of India (RBI) is perceived to have intervened significantly in 2023 and 2024 to maintain exchange rate stability.

Detailed Insights:

• Concerns arise from the potential consequences of artificially stabilizing the rupee, reminiscent of the events preceding the 2025 slide.
• The forex market is factoring in the depreciation that might have occurred during the period of exchange rate stability due to RBI interventions.
• From September 2022, the rupee traded within a narrow range of 81-83 per dollar for approximately two years, before weakening past 84 in October 2024 and 85 in December 2024.
• The RBI states that it intervenes in the market to curb excessive volatility and ensure orderly movement, without targeting specific exchange rate levels.
• In 2022-23, India's Balance of Payments (BoP) recorded a deficit of $9 billion, leading to a 7.6% depreciation of the rupee against the dollar.
• In 2023-24, a BoP surplus of $64 billion prompted the RBI to purchase $41 billion of foreign currency, increasing forex reserves by $68 billion, while the rupee depreciated by 1.4%.
• Economists suggest that the rupee's current challenges are influenced by the exchange rate movements in previous years.
• The possibility of the rupee reaching 100 per dollar is seen as increasingly likely, potentially occurring either next year or this year.
• Continued depreciation could undermine the intended benefits of domestic fuel price hikes.

Key Concepts Involved:

• Balance of Payments (BoP): The difference between a country's total payments to and receipts from other countries.
• Forex Reserves: Foreign currency assets held by a country's central bank.
• Exchange Rate: The value of one currency expressed in terms of another.