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Amidst the turmoil in the foreign exchange market due to global financial uncertainties, increasing geopolitical tension in West Asia and strong US dollar, Union Finance Minister Nirmala Sitharaman has made the stance of the government and the central bank completely clear. Speaking at the Bloomberg New Economy Forum held in New Delhi, the Finance Minister said that the Reserve Bank of India (RBI) is fully alert to curb excessive and unexpected fluctuations in the domestic currency and will continue to take necessary regulatory steps to maintain market stability going forward.
The Finance Minister clarified that the priority of the Reserve Bank of India is not to artificially protect any fixed level of the rupee. The basic objective of the central bank is to ensure an orderly, balanced and transparent environment in the money market so that sudden external shocks do not harm the importers, exporters and the general financial system of the country.
The Finance Minister underlined that there is no weakness in the domestic economy behind the decline or pressure seen in the exchange rate of the Indian Rupee during the last one to one and a half years. Most of the factors behind this originate at the global level, outside the country’s borders. International trade costs have increased due to prolonged high interest rates in the US, a rise in US Treasury yields and the Red Sea crisis in the Middle East, putting pressure on major currencies around the world against the dollar.
Sitharaman reassured investors that India’s macroeconomic fundamentals are completely strong. Fiscal discipline is being strictly followed in the country, current account deficit is under control and foreign exchange reserves are present at adequate levels to deal with any adverse situation.
To stabilize the rupee and reduce the immediate demand for dollars in the currency market, the Reserve Bank of India has taken several major policy decisions in the last few days:
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Strict Forex Derivatives Rules: RBI has tightened the rules for non-deliverable forward (NDF) and currency derivatives trading, so as to curb those making speculative bets against the rupee. Banks and Primary Dealers operating in GIFT City (IFSC) are permitted to offer derivatives only for physical hedging.
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Provisions reserved for banks: The central bank has directed banks to make an additional reserve provision of 20 percent on dollar purchases of more than $2 lakh, so that unnecessary dollar hoarding is stopped.
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Special Dollar Window for OMCs: Government oil marketing companies (OMCs) require huge amounts of dollars to import crude oil. When these companies suddenly start buying dollars from the spot market, there is huge pressure on the rupee. RBI has prepared a separate mechanism for these so that there is no outright pressure on the spot market.
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Measures to increase dollar inflow: To attract foreign portfolio investors (FPIs), investment avenues in government securities have been simplified and foreign currency non-resident deposits (FCNR-B deposits) have been promoted through banks.
The positive impact of these stringent regulatory steps taken by the RBI over the weekend and the clear statement of the Finance Minister was immediately visible on the currency market. The rupee recovered sharply in the early trading sessions of the week and strengthened by about 77 paise to 95.05 and 94.96 against the US dollar in early trade on Tuesday. Market analysts believe that due to speculators exiting the derivatives market, the unnaturally sharp fall in the rupee has been put to a halt and the supply of dollars is normalizing.
During the same program, when the Finance Minister was asked a question on the demand for changes in Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG) tax which have been raised by investors in the stock market for a long time, he showed a very positive attitude. Sitharaman said that many suggestions are being received from market participants and domestic and foreign investors on these tax structures and she is considering these suggestions very seriously. As preparations for the upcoming budget have begun, the government is ready for open discussion on all logical options that will interest the financial markets and encourage investment.
The Finance Minister reiterated that the joint effort of the Government and the RBI is to ensure that the Indian economy remains unaffected by external global shocks. A stable and orderly exchange rate regime will make it easier for Indian exporters to plan their foreign orders in advance, while protecting importers from additional costs caused by currency devaluation. Continuous monitoring by the central bank will ensure that no artificial volatility is created in the currency market due to speculation.