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August 3, 2000
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RBI breaks silence on rupee fall

The Reserve Bank of India's released a statement on the rupee and the recent developments in the foreign exchange markets on Thursday. Following is the text of the statement:

The purpose of this statement is to clarify some issues/ questions that have been raised in the media and elsewhere by analysts, commentators, market participants and others regarding recent developments in the foreign exchange markets, and Reserve Bank's response to these developments. The statement does not contain any new measures.

Strengthening of the US dollar against the rupee and other currencies: In order to consider short-term developments in the value of the rupee vis--vis US dollars in proper perspective, it is necessary to pay attention to what is happening to the value of dollar in relation to other major currencies during the period.

Yesterday (August 2, 2000), for example, the rupee depreciated against the dollar by 21 paise (over the reference rate on August 1, 2000) or less than 0.5 per cent. On the same day, dollar appreciated against Euro by 1.1 per cent and by 0.2 per cent against pound sterling.

Similarly, between 1 July 2000 and 2 August, dollar appreciated by nearly 4.0 per cent against the euro, by 3.2 per cent against the yen, and about 1.5 per cent against the sterling as well as the rupee. As a result of the movement of US dollar against these currencies, rupee strengthened against euro by as much as 2.5 per cent, and by 1.5 per cent against yen, and remained stable against sterling. These currencies (euro, pound and yen) are currencies of India's other major trading and investment partners.

Thus, while it is true that rupee has depreciated against the dollar last month, it is equally true that rupee has sharply appreciated or remained stable against currencies of its other major trading partners in Europe, the UK, and Japan.

Going beyond the dollar, and taking the movement of the rupee against other major currencies, it is simply wrong to say that rupee has hit 'an all-time low'.

The 'Oil Effect' and the 'Inflation Effect':

Frequent references have been made in recent days to the effect of increase in prices of crude oil internationally on India's trade and the effect that this may have on the exchange rate. The increase in the prices of imported oil has indeed been high. It is also true that this increases in import bill substantially.

However, it is important to remember that prices of crude oil were also very high last year also. (They were close to $25 per barrel at the end of December 1999 as against about $26 on August 2, 2000). And yet, last year we added to our reserves by $5.5 billion.

The other point that has been made is the effect of higher rate of inflation on the value of the rupee. The major reason for increase in the rate of inflation in the recent period in India is the increase in the prices of petroleum products, including mineral oils, etc. Excluding this impact of an external factor, the annual rate of inflation in India currently is less than 4 per cent.

In the US and Europe as well as several other countries, it is normal to exclude the effect of oil prices, and certain other prices, for determining the core inflation rate for purposes of monetary policy decisions and inter-country comparison of inflationary pressures.

As pointed out in statements, RBI does not use short-term movements in Real Effective Exchange Rates (REER), or any other similar variable, as an indicator of appropriateness or otherwise of exchange rate movements in the short-run.

However, as these measures have some importance for research and analysis of longer term trends in international competitiveness, RBI releases figures of REER in its monthly bulletin for different base year levels using both 5-country and 36-country currency trade weights.

The present imputed value of rupee per US dollar, based on the REER (5 country currency trade weight which is the latest available), is given below:

  • Present Value of Rupee: Rs.45.34 per US dollar (August 2, 2000).
  • Imputed value of rupee per US Dollar based on REER (on August 2, 2000):
  • Base Year, 1991-92: Rs.38.38 per US dollar
  • Base Year, 1993-94: Rs.45.01 per US dollar

Despite the increase in our oil import bill as well as increase in non-oil imports in the wake of industrial recovery, the current account deficit in India is still less than 2 per cent of GDP, which is considered by international standards to be low and reasonable. India's exports have also been doing exceptionally well in the current year.

There has, no doubt, been a substantial outflow on account of FII funds in the months of June and July 2000, which has reduced the net volume of capital inflows into the country. The FII funds, by their very nature, tend to be somewhat volatile, and our reserve policy in the last few years has taken this factor into account. India very much welcomes FII inflows, but at the same time, we are aware that these flows in the short run can be affected by legitimate corporate considerations, including developments in markets of other countries.

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