Speaking to the Indian Express, Khara said: “I think (central bank intervention) doesn’t really work…. Artificial intervention has no long-term effect, it can only have a temporary effect.”
However, he added that we should instead focus on the trade balance. “Compared to that, I would say that if the trade balance is at all in our favour, it probably works better.”
The Reserve Bank of India intervenes from time to time to contain the fluctuations in the rupee, by selling dollars and buying rupees from the market, and for the past six months or so it has depleted the foreign exchange reserves.
“A lot of our foreign exchange reserves are already gone. From more than $600 billion, we are now at $580 billion.
It is important to note that in the first week of September 2021, foreign exchange reserves amounted to $642.4 billion, and on July 8, 2022 it fell to $580 billion – a decrease of $62 billion in ten months. In the same period, the rupee fell nearly 10 percent from 72.96 to 80 to the dollar.
While the Reserve Bank of India has taken several measures including temporarily allowing banks to collect new FCNR(B) and NRE deposits without reference to the applicable regulations on interest rates, in a bid to attract foreign investment, Khara said one has to wait and watch to see the impact. . One of these measures, as it has only been more than a week since the banks raised interest rates.
“FCNR (Deposit System) is a very interest rate sensitive product. We see that interest rates are going up in different markets. But it usually happens that when it comes to NRE the inflows usually go up as the rupee weakens. It is also a repatriable account. Perhaps this kind of relief provided by the Reserve Bank of India (RBI) is the basis for the FCNR (B) scheme. We also increased the interest rate on July 10. It is too early to truly gauge the potential impact,” Khara said.
While FDI and FDI investments are key to stabilizing the rupee, and India has seen steep outflows of over Rs 2.64 crore by foreign portfolio investors from Indian stock markets since October 2021, Khara said investors looking for FDI investments They look forward to India a lot. India’s “political stability” is a major motivating factor for this.
“They are all looking at India with great interest. But yes, they will probably wait and watch because a lot of them in particular, when it comes to FDI, always come up with a very long-term perspective. Some long-time lone investors look at the country with great interest for the simple reason that Political stability and also the way the country has been globally accepted in the recent past. I think these are some of the reassuring factors that these investors are looking at.”