For further reading: Rupee vs Dollar Today: Rupee falls to 80/dollar — why is it happening, and where will it end? (indianexpress.com)

The rupee fell below the psychological mark of 80 against the US dollar to hit a new record low in the morning deals on Tuesday (19.07.2022).

       The Indian rupee has been under pressure (Depreciating) so far this year due to multiple factors – rising crude and other commodity prices that spiked in the wake of the Russia-Ukraine war, Foreign Institutional Investors (FIIs) pulling out money from the domestic equity markets, a ballooning trade deficit, rate hike by the US Fed and the rising demand for the USD due to its safe haven status. Indians are also  importing more goods and services than what they export. This is what is called Current Account Deficit (CAD). When a country has it, it implies that more foreign currency (especially dollars) are flying out of India than what is coming in.

 The rupee’s exchange rate vis-à-vis the US dollar is essentially the number of rupees one needs to buy a single US dollar.

When the rupee depreciates, buying (importing) something from outside India becomes costlier.. By the same logic, if one is trying to sell (export) goods and services to the rest of the world (especially the US), a falling rupee makes India’s products more competitive because depreciation makes it cheaper for foreigners to buy Indian products. because Indians are demanding more dollars to import goods from outside the country.

LEARNING FROM HOME/ WITHOUT CLASSES/ BASICS

Foreign exchange reserves are assets denominated in a foreign currency that are held by a central bank.

Forex reserves are external assets in the form of gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the RBI.

In India, the Reserve Bank of India Act 1934 contains the enabling provisions for the RBI to act as the custodian of foreign reserves, and manage reserves with defined objectives

Foreign exchange reserves are the foreign currencies held by a country’s central bank. A strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to the foreign currency from the domestic market. They are called reserved assets in Balance of Payments and are located in capital account.

• The most important reason to have reserve is  to manage one’s currencies values. They are usually used for backing the exchange rate and influencing monetary policy.
• Reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements.

1 . The most significant objective behind this is to ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.

2. If the value of the Rupee decreases due to an increase in demand of the foreign currency then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
3. A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
4. A good forex reserve helps in attracting foreign trade and earns a good reputation in trading partners.

India’s robust and swelling foreign exchange reserves provide confidence to credit rating agencies and prospective foreign investorsthat external obligations of the country can always be met and that India has the ability to manage the balance of payments. Hefty reserves guarantee timely payment for repatriation of profits and portfolio outflows, both crucial to attract direct and portfolio foreign investments

The High Level Committee on Balance of Payments (Chairman: C. Rangarajan), 1993, had recommended that the target for foreign exchange reserves be fixed in such a way that they are generally in a position to accommodate imports of 3 months. It may also be noted that the Committee on Capital Account Convertibility (Chairman: S.S. Tarapore), 1997 suggested an import cover of 6 months.

Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market. FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds, done with the expectation of earning a return.

Foreign exchange reserves are the foreign currencies held by a country’s central bank. A strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to the foreign currency from the domestic market. They are called reserved assets in Balance of Payments and are located in capital account.

A capital account keeps a record of all the transactions related to assets between India and other countries. This includes all kinds of investment assets like shares, debt, and property, or even corporate assets. Currently, India has a partially convertible capital account policy.

         The balance of payments account, which a statement of all transactions made between a country and the outside world,

consists of two accounts — current and capital account.

While the current account deals mainly with the import and export of goods and services,

the capital account is made up of cross-border movement of capital by way of investments and loans.