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Why the Indian Rupee withstood the global currency turmoil?


Why the Indian Rupee withstood the global currency turmoil?
Almost every emerging market currency was jolted this week from the South Africa Rand, to the Argentinian Peso, to the Turkish Lira to the Russian Rouble and the Brazilian Real.

Several countries have been defending their currencies, by hiking rates and intervening in the markets.

India's currency has almost remained flat in the last few weeks and has shown remarkable resilience, even as emerging market currencies have been pounded, following the US move to reduce QE3. Read more on QE3 here

For a change we must give due credit to the government and than to the RBI for a number of measures initiated in the last six months or so to ensure that the rupee remains resilient to external shocks.

The steps initiated by the government to bring down the current account deficit has been exemplary. India's Current Account Deficit (CAD) widened to a record 6.7 per cent of GDP in December 2012 quarter, driven by heavy oil and gold imports. Read more on CAD here

In the July-Sept quarter of 2013, CAD has fallen to a very much manageable level of 1.2 per cent of GDP.

CAD is the excess of all goods, services and transfers imported over its total exports. A fall in the CAD puts the rupee and the country on a strong footing, and helps to manage the currency well.

A series of measures have been initiated by the government to narrow the CAD and help the rupee. First, a number of measures to curb gold imports has borne rich dividends with gold imports falling and thus reducing imports and bringing down the CAD.

In fact, many analysts now see gold imports falling by as much as 30 per cent in 2014, which is further good news for the current account deficit.

Another initiative to reduce the pressure on the rupee is a number of other schemes to boost dollar inflows. India has received over nine billion dollars from two foreign schemes, which were announced in September to attract foreign funds and help the country to bridge the widening current account deficit (CAD).


PTI had quoted Finance Minister Chidambaram as saying last year that "Banks have taken advantage of RBI's liberalisation of FCNRB and Tier I capital schemes. So far, under the two schemes put together, banks have brought in $9.6 billion.,"

Exports have also picked up as global revival takes place, which has bought down CAD further.

The government and the RBI in sync have done a good job in also boosting our currency reserves and bracing for any threats to the currency from further QE3 easing.

It's unlikely that the rupee will fall back to the historic lows of 68.81 seen in the month of September last year, thanks to a job well done.

Story first published: Saturday, February 1, 2014, 9:55 [IST]
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