RBI may need to tweak its forex strategy and let the rupee weaken, say, analysts

Forex: After the rupee hit its record low on June 29, analysts and experts criticized the central bank for the slow decline. They have mentioned that RBI should change the outlook and the current method of intervention.

The rupee has hit a new low and has been declining for three weeks. In the forwards market, RBI’s current intervention strategy is only enabling the currency to fall more. Experts and traders have criticized this and suggested a change in approach. At the same time, they have also acknowledged the slow pace of decline and said this can be controlled in time. Currently, the rupee is volatile and has recorded very low against the US dollar. 

The currency has seen a total decline of 6 percent this year. The reasons for the decline are the rising inflation, high crude oil prices, persistent outflow of foreign funds, hike in interest rates, and the current trade deficit. To gain control of the decline in RBI has sold dollars in the spot market as well as bought and sold in the forwards market. According to analysts this action of RBI has led to a further crash in the market and a crash in premiums which is now below 3 percent. This was recorded so low last in November 2011. 

The rupee’s value yesterday was recorded at a low of 78.97. This value will fluctuate this week depending on the oil prices, say traders. Madhavi Arora, a senior economist has stated that allowing the rupee to weaken over time is the right strategy, this will enable CAD space in the market to improve. Research reports claim that the rupee could weaken to 81 by the end of FY23. 

According to a monetary policy statement, many currencies have faced rapid depreciation in the market. However, the rupee has been declining at a rate of 2.5 percent. This was recorded on June 8 and a monetary policy was formed but the currency’s value had depreciated further. The demand for the US dollar had increased in the forex market. With the current volatility of INR, trade in the country has been affected. There are many effects on the economy, some impacts are short-term while some are long-term. The currency market has opened today and the value will depend majorly on the oil prices.