RBI has record forex reserves, but why is rupee still not out of the woods?
The currency is now hovering back to its two-month lows. While the RBI is intervening to prevent major volatility, the fact is the rupee is still facing immense pressure, and experts believe the currency is unlikely to appreciate much any time soon.
India's record-setting foreign exchange reserves are being built through a special scheme called FCNR(B), but the rupee's strength remains elusive. The RBI has been intervening to prevent major fluctuations in the currency, but experts believe the rupee is unlikely to appreciate significantly in the near future. The reason for this discrepancy between the record forex reserves and the weak rupee lies in the way these reserves are held.
Most of the reserves are parked on the RBI's books rather than being actively traded in the open market.
The rupee has been impacted by a number of factors, including a widening trade deficit, foreign investor outflows, and high US Treasury yields. The trade deficit has been exacerbated by strong demand for dollars due to oil imports and even gold purchases. In addition, foreign investors have been pulling money out of Indian equities, particularly in response to geopolitical tensions and higher crude prices.
Meanwhile, the US has been offering attractive yields on its bonds, making Indian investments less appealing to global investors. With the US Federal Reserve indicating further rate hikes this year, the dollar is expected to continue strengthening, putting downward pressure on the rupee. The RBI aims to keep volatility in check, but fundamental factors are preventing the currency from appreciating.
Written by urgent.news from Times of India's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
