(Newswire.net — March 17, 2022) — The Reserve Bank of India (RBI) is expected to increase its intervention in the foreign exchange market to avert dramatic fluctuations of the Rupee amidst concerns of inflation and the Russia-Ukraine war.
The performance of the Indian Rupee against the US Dollar has been below expectations in January and February. Unless an urgent intervention is executed, the Indian Rupee will continue to depreciate against the US Dollar, which may have a negative effect on forex trading in India.
The lowest value in history
As a result of the surge in oil prices, the Indian rupee recorded the lowest price in history against the US Dollar. It dropped below 76.9 rupees per USD. With a clear indication that the rupee may continue depreciating against the USD, economists in India are expecting RBI to intervene and avert the fluctuations of the Rupee.
Impact of Russia-Ukraine War
The financial markets in India and other countries were shaken after Russia invaded Ukraine in February. Even before the invasion, most countries were experiencing turmoil, since the geopolitical tensions were imminent. The raft of measures including sanctions against Russia affected the financial markets.
As soon as the conflict escalated, international oil prices hiked, hitting $130.21 per barrel. The exodus of capital from India because of the Ukraine war is also another main reason why the rupee has devalued against the US Dollar. Economists in India explained that the uncertainty of the war is causing stakeholders to withdraw their ventures in India and take them to “safe havens”. Even though the United States economy was also hit by the war, the effect on investments was not as dire as that experienced in India, thus explaining why the Indian Rupee is struggling against the US Dollar amidst the ongoing war.
With India’s economy largely dependent on imported oil, the increase in international oil prices has affected the economy of the country. International oil prices have jumped over 34%, which is the highest registered since 2008.
As long as the war is ongoing, the rupee is not expected to recover against the US Dollar. Even before the war broke, Rupee was already weak and it was expected to hit its lowest point in mid-year. However, the Russia-Ukraine war accelerated the depreciation of the Indian Rupee. The depreciation of INR against USD started in 2018 with rupees standing at 63.85 per USD. Since then, it has lost an additional 17% of its value.
Which way forward?
RBI must rethink its course of action when it next meets to discuss monetary policy. In this global reality, the effects of the Russia-Ukraine conflict are certainly not limited to these two countries; it has ramifications that other economies must deliberate upon.
RBI needs to examine the effect of the war on India. It must reassure venture capitalists of their safety in the country. With no certainty of when the war is expected to end, RBI must discuss monetary policies that protect the Indian economy amidst the war.