Depreciation of the rupee is unlikely to be permanent

- India still has enough foreign exchange reserves to cover the current account deficit for 65 months

The foreign exchange reserves also declined to around $104.93 billion as on September 23, 2022, as against a high of $642.45 billion on September 3, 2021, as the value of one dollar has fallen to around Rs.82. hides more than Considering three aspects,

First of all apart from dollar assets, some foreign exchange reserves are also held in foreign currencies like Euro, Yen etc. This policy of diversification is good but what happened was that all these currencies depreciated significantly and because of this the Reserve Bank lost foreign exchange. However, if the depreciation of these currencies is not permanent, in that case the losses seen now will not be seen in the future. Second, the RBI suffered losses in its portfolio of foreign exchange reserves in the proportion of medium-term or long-term bonds. It suffered after the Federal Reserve raised interest rates. But it is not clear why the RBI held such bonds when it was clear that interest would rise resulting in a fall in the value of its foreign exchange reserves. This is the loss of the whole country. Third, foreign exchange reserves declined as the rupee depreciated. Although this aspect is well known, it is not well understood.

Efforts to stem rupee depreciation account for a third of the shortfall in forex reserves. Another way to look at it is that 5.4 percent of the peak level of foreign exchange reserves was used to prevent the depreciation of the rupee. Ignoring the short-term uncertainty, the rupee depreciates against the dollar almost every year. This is mainly because inflation in India is higher than in the US. is more than But now the situation is totally opposite. Currently the inflation rate in India is US is less than In such an ideal situation there should have been a temporary appreciation of the rupee immediately. But that didn't happen on the contrary the rupee depreciated.

Going forward we may see some appreciation in the rupee. At least the depreciation of the rupee would have been a little less than normal which may be seen in the coming months or even quarters. This can be done by using part of the foreign exchange reserves to compensate for the depreciation of the rupee. Had the RBI intervened more aggressively, perhaps more losses could have been contained. Such interventions have continued with a flexible inflation targeting policy regime.

It is true that the proposed policy would also have reduced RBI's reserves significantly but the basic role of foreign exchange reserves is that they should be used at times when the rupee is depreciating but enough to cover potential current account deficits for 65 months no matter what. Foreign exchange reserve.

It is often argued that let the rupee find its footing in the market especially at a time when other world currencies are depreciating against the dollar and India needs to protect its export share. This argument is valid although the devaluation of other currencies is permanent in nature. But it is difficult to do. If so, the rupee will also be seen relatively stable. Other currencies are unlikely to remain permanently low because ultimately the purchasing power of the currency matters. As such, low values ​​of many currencies (like the rupee in this case) cannot last forever. Yen is a classic example of this. Currently, it is trading at 145 against the dollar. Thus, it does not seem possible for all currencies to remain weak.