RBI INTERVENTION IN FOREX MARKET AND CURRENCY DEPRICIATION

SUBMITTED TO :- RAJESH SIR

BY-DHARA PATEL (10pgdm011)

MEANING OF RBI INTERVENTION

In the wake of the rupees slide, there has been much talk about the RBIs intervention in the currency markets to support the Indian currency, including a massive sell-off of dollars.

Monetary policy - Management of money supply and interest rates by central banks to influence prices and employment Expansion or contraction of investment and consumption expenditure.

TYPES OF INTERVENTION
DIRECT INTERVENTION INDIRECT INTERVENTION STERILISED INTERVENTION UNSTERILISED INTERVENTION

RESERVE BANKS INTERVENTION AND STERILIZATION

As observed during the various episodes of exchange rate volatility in India, the Reserve Bank has been intervening in the foreign exchange market to curb volatility arising due to demand-supply mismatch in the domestic foreign exchange market.

Sale of dollars in the foreign exchange market is generally guided by excess demand conditions that may arise due to several factors.

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Cont
Similarly, the Reserve Bank purchases dollars from the market when there is an excess supply pressure. There is some evidence of co-movement in demand-supply mismatch proxied by the difference between the purchase and sale transactions in the merchant segment of the spot market and intervention by the Reserve Bank.

Thus, the Reserve, Bank has been prepared to make sales and purchases of foreign currency in order to curb volatility, even out lumpy demand and supply in the foreign exchange market and to smoothen jerky movements, while allowing the rupee to move in both directions.

However, such intervention is generally not governed by any pre-determined target or band around the exchange rate.
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CURRENCY DEPRECIATION

It means that Indian currency is worth lesser now in comparison with some other currency.

For India, this other currency is primarily US Dollars.

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INDIAN RUPEE HAS BEHAVED IN COMPARISON TO US DOLLARS FOR PAST 10 YEARS.

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Indian rupee appreciation against dollar impacted heavily to the following:

Exporters

Foreign investors

Importers

DEMAND SUPPLY RULE

Rupee quotation follows the simple economic rule of Demand & Supply. If there is more demand for dollars in India than the supply for it, Rupee would depreciate and vice-versa. Demand of dollars may be created by Importers requiring more dollars to pay for their imports, FIIs withdrawing their investments and taking the dollars outside India, etc. Supply is created by exporters bringing in more dollars from their revenues, NRIs remitting more funds, FIIs bringing more dollar in India to drive their investments.
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OIL PRICES
With the increasing price of Oil in international markets, India has to pay an increased amount of dollars to import the same quantity of oil. Further more, with an increase in the quantity of oil imported into India, a further pressure is imposed on the demand of dollars to pay to our suppliers from whom we import Oil.

This increase in demand for dollars depreciates the Rupee further.

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NEGATIVE IMPACT OF CURRENCY DEPRICIATION

Oil Infection Higher Inflation

Poor Returns For Fiis

Repayment Of Loans Foreign Education

Foreign Holidays

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