The USD-INR ratio hit a massive 54.3875 (RBI Ref Rate) and 54.56 in the spot market today.
Ooh. This is bad. The crude price falling about 10% from the 124 levels down to 112 is getting offset by the appreciation in the dollar.
RBI has been buying heavily and is conducting OMOs to offset the loss of rupee liquidity. (When the RBI sells dollars, it gets rupees that then go out of circulation. So the RBI uses the rupees to buy GOI bonds through OMO auctions to bring the rupees back in)
The rupee looks like it’s going down further and the USD INR Rate is hitting new highs. There are structural problems – the huge trade deficit (nearly $160 billion) is a major factor, and the fact that we simply aren’t doing enough to encourage foreign investment. We have traditionally funded our heavy trade deficit through foreign investment inflows and transfers (read: NRI remittances) – today, while NRIs continue to do their thing, FDI and FII inflows have slowed to a trickle. We need to import a lot lesser and export a lot more. We don’t need a trade surplus but we could make the deficit a lot less wide.
