Context:
Recently the Indian Rupee hit an all-time low of Rs. 85 against the US Dollar.
Reasons for fall in Rupee value
Continuous outflow of foreign portfolio investment from securities markets
Excessive stock valuation
Discouragement of corporate performance
Economic stimulus by China
Change of power in the US
Trump likely to adopt protectionist policies
Lower domestic consumption and investment
Effects:
Increase in trade and current account deficit
Increase in import inflation
Uncertain foreign investment flows
Efforts to arrest fall in Rupee value:
Reserve Bank of India (RBI) is taking a proactive stance in the foreign exchange market to arrest the free fall of Rupee. This has been termed as an ‘orderly’ exchange operation by the RBI.
Former RBI Governor, Shaktikanta Das has rejected the idea of a BRICS currency and made it clear that India has no de-dollarisation agenda.
The government should also issue a clear statement to this effect in public forums and diplomatic talks to put the issue to rest as it may adversely impact India-US bilateral trade.
RBI can use foreign exchange reserves to a certain extent to manage rupee volatility.
The Finance Ministry has admitted that the recent fluctuations in the exchange rate impede the independence of monetary policymakers. In such a situation, policymakers should be prepared to deal with this new risk.