THE GIST of Editorial for UPSC Exams : 21 March 2020 (Centre, RBI must take adequate measures to prevent rupee volatility(The Hindu))

Centre, RBI must take adequate measures to prevent rupee volatility(The Hindu)

Mains Paper 3:Economy
Prelims level: Currency volatility
Mains level:Advantages and disadvantages of the currency volatility

Context:

The rupee’s sharp slide past the 75-mark against the dollar, is likely to create a fresh set of challenges for the RBI and the Centre.
The panic triggered by the Covid-19 pandemic is leading to heightened risk-aversion in global financial markets.
The uncertainty surrounding the pandemic — over the time it could extend, its impact on the health and lives and the extent of damage it would do to the global economy — is making funds flee riskier assets such as emerging market currencies and move to the safety of dollar-denominated assets.
That is probably why the dollar index has zipped past the 100-mark, and the CBOE volatility index is at a level last recorded in 2008. With the rupee crumbling, a source of stability for the Indian economy has receded somewhat.

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Problems of recent currency downfall:

The currency had been fairly steady last year, moving in a band between 68 and 72, helped by robust foreign investment flows.
Foreign portfolio investors had net purchased around ₹1 trillion in Indian stocks in 2019 and ₹26,000 crore of Indian debt securities.
Foreign direct investments were also 22 per cent higher in the period between April 2019 and January 2020 compared to the previous fiscal year.
But the ongoing turbulence has made the Indian currency lose 4.87 per cent against the greenback this calendar year.

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Overall currency performance is superior:

The rupee’s performance is, however, superior to the currencies of Indonesia, South Korea, Thailand and Singapore, that have lost 7-12 per cent against the dollar since January.
The relatively superior performance of the rupee could be due to the benefit to our external account due to the slide in crude oil prices.
However, a large part of this benefit has been nullified by the relentless selling by FPIs this year — amounting to ₹50,000 crore of net outflow from debt and ₹26,000 crore out of Indian equity.
This has been dragging the rupee lower, despite the RBI’s measures to contain volatility in the forex market through the US dollar sell/buy swap auctions.

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Need to proper utilise the weakness of rupee:

It may be argued that some amount of rupee weakness is good, from the exporters’ point of view.
Also, the rupee’s 36-currency trade weighted real effective exchange rate at 119 as on February this year, could also lead to the RBI allowing the rupee depreciate a little further, as it makes our exports more competitive.
But the benefits of a weak rupee need to be weighed against the possibility of imported inflation and the stress on corporates who have borrowed overseas.
It is also a moot point whether export demand will pick up in the short run when shipments are not happening.
While a steady rupee decline is par for the course, sudden declines can be quite disruptive to economic activity and investor confidence.

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Conclusion:

The RBI has the option of using its ample forex reserves to contain this volatile phase, if it persists.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1)With reference to the National Cybercrime Training Centre (NCTC), consider the following statements:

1. It is meant for professional quality eLearning services on cyber crime investigation on large scale to police officers, judges, prosecutors and other stakeholders.
2. It is under the Union Ministry of Home Affairs.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2