Global monetary tightening, costly crude, Ukraine crisis led to Re fall: FM

Maintaining that the Indian currency is faring better than the Japanese yen, British pound, and the euro against the greenback, finance minister Nirmala Sitharaman today attributed the depreciation of rupee against the dollar to the global factors like the Ukraine crisis, soaring crude prices, and financial tightening in the global economy.

She also added that the foreign portfolio investors (FPIs) have withdrawn $14 billion from the Indian equity markets so far in the current financial year owing to the monetary tightening in the advanced economies.

“Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the U.S. dollar. Currencies such as the British pound, the Japanese yen and the euro have weakened more than the Indian rupee against the U.S. dollar and therefore, the Indian rupee has strengthened against these currencies in 2022,” Sitharaman said in a written reply to the Lok Sabha.

“The outflow of foreign portfolio capital is a major reason for the depreciation of the Indian rupee. Monetary tightening in advanced economies, particularly in the United States of America, tends to cause foreign investors to withdraw funds from emerging markets. Foreign portfolio investors have withdrawn about $14 billion from Indian equity markets in FY 2022-23 so far,” Sitharaman added.

It may be noted that the global central banks are hiking the interest rates in an effort to fight decade-high inflation, stoked by the supply side disruptions caused by the Ukriane crisis. This has triggered a flight of capital to the developed economies putting pressure on the currency. The U.S. ten-year bond yield has touched 2.9% compared with 0.89% in 2020, thereby offering an attractive haven to the global funds amid the economic uncertainties caused due to the war, high global inflation and monetary tightening.

Being asked about whether the ministry has assessed the impact of the depreciation of the currency, Sitharaman said, “Depreciation of a currency is likely to enhance the export competitiveness which in turn impacts the economy positively. The depreciation also impacts the imports by making them more costly.” She added that the Reserve Bank of India (RBI) regularly monitors the foreign exchange market and intervenes in situations of excess volatility.

Enumerating the measures taken by the RBI, Sitharaman said recent measures taken by RBI include exemption of incremental Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposits from the maintenance of cash reserve ration (CRR) and stautory liquidity ratio (SLR) up to November 4, 2022, exemption of fresh FCNR(B) and NRE deposits from the extant regulation on interest rates to allow banks to provide higher interest rates till October 31, 2022 than those offered to comparable domestic rupee term deposits with a view to attract foreign currency deposits, revision of regulatory regime relating to foreign portfolio investment in debt flows to encourage foreign investment in Indian debt instruments.

The RBI has also raised external commercial borrowing limit (under automatic route) to $1.5 billion and the all-in-cost ceiling by 100 bps in select cases up to December 31, 2022.