Return of the Market Stabilisation Scheme?

Abstract

The Indian economy saw a surge in capital inflows in 2020, despite the Covid-19 pandemic, through foreign direct investment (for example, in Jio Telecom) and foreign portfolio investment (in the secondary markets). Despite this, the Rupee was reportedly the worst-performing Asian currency in 2020. Blame it on the RBI! Why would the Reserve Bank of India keep the exchange rate low, risking the United States' wrath by potentially being labeled a currency manipulator? A Dollar deluge puts upward pressure on the Rupee. Imports become cheaper while exports can become uncompetitive. India, with the rare exception of the current financial year 2020-21 (till date i.e. February 2021), has been running a perennial current account deficit; in other words, our exports of goods and services and NRI remittances are not sufficient to meet our import bill. Exports are critical to managing the current account. RBI, therefore, needs to step in to curb excessive Rupee appreciation (which can make exports uncompetitive) in the face of capital inflows.