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Opinion National Interest PoV 50-Word Edit

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Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

RBI’s defence of the rupee has its limits. Tough calls may lie ahead

RBI could give up its current interest rate position and hike rates, encouraging foreign capital to profit from that. But that hike would incur a cost on growth.

Should the RBI defend the rupee? There are arguments on both sides. But perhaps the more important question is, can RBI defend the rupee and at what cost? Sometimes, it’s easy to forget that the Rupee-Dollar exchange rate is a price. It is like the price of anything else, determined by the forces of demand and supply. 

When the demand for dollar goes up (in the event of higher imports or capital outflows), the exchange rate will depreciate and vice versa. Any intervention must weigh whether it can help alter the equation.

This is a tough moment for India. The West Asia conflict has sent the prices of oil soaring. Oil is India’s biggest import. A substantial rise in the cost of oil increases the demand for dollars—the payments are made largely in the US currency. India’s second largest import is gold. The price of gold is soaring, too. 

Hence, there is added pressure on the import side and even greater demand for dollars.........

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