Rupee has maintained its position as one of the best performing Asian currencies, despite the ongoing challenges and geopolitical crisis in the Middle East. Pankaj Chaudhary, Minister of State for Finance on Monday said that this stance indicates India’s strong economic fundamentals.
In a written reply in the Lok Sabha, he mentioned that Rupee’s is market-determined, not limited to any target or specific level.
He noted that, as of November 19, 2024, the domestic currency had dropped 1.4 percent against the US dollar in the current calendar year (CY) 2024 and decline was primarily driven by the overall strength of the USD.
“During CY 2024, Dollar Index has increased by about 4.8 per cent till November 19, 2024. More recently, the Dollar Index touched 108.07 on November 22, 2024, its highest in more than a year, exerting pressure on emerging market currencies,” he said.
Geopolitical tensions
Additionally, geopolitical tensions in the Middle East and the uncertainty surrounding the results of the US elections further contributed to the challenges.
Despite this, the MoS emphasized, “INR remains one of the best-performing Asian currencies.”
As of November 19, 2024, major Asian currencies such as the Japanese Yen and South Korean Won had fallen by 8.8 percent and 7.5 percent, respectively. Notably, all G10 currencies, with the exception of the British Pound (GBP), had depreciated by more than 4 percent during CY 2024.
“The relative stability of the INR bears testimony to India’s sound and resilient economic fundamentals, macroeconomic and financial stability,” he said.
Impact on exports, imports and domestic prices
A depreciating currency is likely to increase prices of imported goods by is expected to boost export competitiveness, resulting in a positive outlook for the economy.
The total impact on domestic prices, and consequently on citizens because of exchange rate depreciation, depends on the extent to which international commodity prices are passed through to the domestic market.
Global developments
He stated that the RBI closely monitors global developments that could impact the USD-INR exchange rate. These developments include monetary policy actions by major central banks, key economic data releases globally and their impacts, decisions made at OPEC+ meetings, the tracking and analysis of geopolitical events, as well as daily movements in G10 and emerging market currencies.
The apex bank also regulates the foreign exchange market with ensuring its orderly functioning and development, intervening only to curb undue volatility in the INR.
The Mos stated that in the FY22 Budget, the centre set a target to reduce the fiscal deficit to below 4.5 percent of GDP by FY26 to maintain sufficient flexibility in managing public finances prudently while ensuring adequate resources for social welfare and development projects.
He added that the Ministry of Finance continuously assesses the impact of the fiscal deficit.
FDI inflows
Chaudhary explained that FDI inflows are influenced by various factors, including the availability of natural resources, macroeconomic stability, foreign investors’ decisions, the global investment climate, central bank interest rates, and tax regulations, among others.
Since last 5 financial years, he noted, the FDI has fallen from $43 billion in 2019-20 to $ 10.1 billion in 2023-24.