India’s central bank sold US dollars worth at least $5 billion (Rs 44000 cr) in both the onshore and
the offshore markets recently, to help support the rupee, which fell to a record closing low of
87.89. Here's a summary of what's been happening:
● The currency has come under pressure ever since President Trump levied 25% tariffs on India.
● On Aug 6, the tariff was doubled to 50%, with Trump saying he did not take lightly to India
buying Russian crude.
● That has seen the rupee fall more than 2% on a YTD basis, and become the worst-performing
currency in Asia.
● Market chatter is that on multiple days, the RBI seemed to be active in the offshore market
just
before the spot market was set to open at 9 AM.
● RBI's actions seem to be targeting the recent excess volatility being witnessed in the rupee.
● The intervention is a shift from what RBI Governor Malhotra had said earlier about letting the
currency find its path.
Below are answers to some questions:
● Why is excess currency volatility bad?
o Creates uncertainty
o Makes it harder to control inflation
o Makes the financial system riskier
o Reduces the effectiveness of monetary policy
o Erodes investor confidence
● How is a falling currency inflationary?
When the currency drops, exporters want to export more. This is because the more they export, the
more their dollars will be worth when exchanged in rupees. If they export more of what they produce,
the supply available for domestic consumption will fall. Even if demand remains the same, the drop
in supply will cause prices to rise, leading to a pickup in inflation.
● What are the onshore and the offshore markets?
Onshore refers to the "spot" USD/INR market. This market opens at 9 am and closes for trading at
3:30 pm. In the spot market, settlement happens in T+2 days. This means the buyer of USD will get
the delivery of the USD and will have to deliver INR after two trading days.
Offshore means the "non-deliverable forwards" market. In this market, participants trade currencies
that cannot be traded freely globally - the rupee is a very actively traded currency in the NDF
market; NY, London, Singapore, and Dubai are major centres. "Non-deliverable" means the currencies
are not physically exchanged and are instead cash-settled.
India
NRI
