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Amid the International Monetary Fund’s reclassification of the exchange rate regime to “stabilised arrangement” from “floating” for the period from December 2022 to October 2023, the Indian rupee has maintained a remarkably stable position in the foreign exchange market.

Over the past four months, there has been a drop in fluctuations in the dollar/rupee exchange rate. The average daily trading range for the Indian currency has contracted from 20 paise in the first half of 2023 to a mere 9 paise in the last three months of the year.

This stability is exemplified by the horizontal appearance of the dollar/rupee graph, suggesting a consistent and controlled exchange rate.

What IMF said

The IMF had that the Indian rupee-dollar rate experienced minimal fluctuations from December 2022 to October 2023, remaining within a narrow range. Despite a slight fall in the rupee during this period, the consistent stability suggests significant interventions by the Reserve Bank of India in the foreign exchange market, it said. In light of this prolonged stability, the IMF reclassified India’s exchange rate regime from a “floating” to a “stabilised arrangement” for the mentioned duration.

Building reserves

Analysts point out that the RBI’s intervention strategy appears to go beyond managing volatility and may be driven by various factors. One possible motivation is the need to accumulate reserves to prepare for unforeseen geopolitical events. The central bank’s unwavering support through dollar sales and proactive replenishment of reserves has played a role in constraining the rupee’s movements.

As of December 29, India’s foreign exchange reserves reached a 21-month high of $623.20 billion, reflecting a $40 billion increase from October 20. The accumulation of reserves gains significance as India is set to be included in JP Morgan’s Global Bond Index, potentially leading to an estimated $30 billion in inflows.

Some market participants believe that the RBI is deliberately fostering an image of the rupee as a stable and reliable currency amid global volatility. This strategy could enhance investor confidence and attract foreign investment, especially with India’s increasing exposure in global bond markets.

Despite concerns and speculations regarding the RBI’s intervention strategy, Governor Shaktikanta Das has emphasised that the rupee is a free-floating currency, determined by market forces. However, market participants continue to observe the central bank’s actions closely, anticipating its influence to persist in the near future. While expectations of rupee appreciation exist, the low volatility regime is expected to continue, with the extent of appreciation potentially influenced by the central bank’s actions.

  • Published On Jan 24, 2024 at 08:00 AM IST

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