The country's foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market, union minister Arun Jaitley said on Wednesday, a day after the rupee sank to an all-time low. The rupee hit a record low of 70.1 per dollar on Tuesday, as concerns about Turkey's economic woes spreading to other emerging markets such as India persisted.
"Recent developments relating to Turkey have generated global risk aversion towards emerging market currencies and the strengthening of the dollar," Jaitley said on Twitter.
"However, India's macro fundamentals remain resilient and strong. The developments are being monitored closely to address any situation that may arise in the context of the unsettled international environment," he added.
Jaitley is gradually coming back into public life after his kidney operation. Piyush Goyal was given charge of Jaitley's ministerial portfolios on an interim basis while he has been undergoing medical treatment.
Jaitley was referring to the RBI's foreign exchange reserves which stood at $402.70 billion in the week ended August 3 which provides a comfortable cushion. However, the disturbing part is that it has fallen by as much as $1.49 billion over the preceding week largely due to the sharp increase in crude oil prices that have led to an increase in the country's import bill.
The country's trade deficit has been rising in recent months which means the amount of foreign exchange being earned through exports is falling far short of what has to be paid for imports. Consequently, the RBI has to run down its forex kitty to finance imports.
The RBI uses the country's foreign exchange reserves to iron out volatility in the rupee but at the same time does not target a particular level for the exchange rate against the dollar. When the value of the rupee falls suddenly against the dollar, the RBI intervenes by selling dollars in the market which doubled tariffs on some US imports including alcohol, cars and tobacco on Wednesday in retaliation for US moves, but the lira rallied further after central bank's liquidity moves had the effect of supporting the currency.
Ankara acted amid increased tension between the two NATO allies over Turkey's detention of a Christian American pastor and other diplomatic issues, which have helped send the lira tumbling to record lows against the dollar. The currency has lost more than 40 per cent against the dollar this year, driven by worries over Erdogan's growing influence over the economy and his repeated calls for lower interest rates despite high inflation.
The rebound of around 6 percent on Wednesday, briefly strengthening to less than 6.0 against the dollar, came after the central bank squeezed lira liquidity in the market, effectively pushing up rates and supporting the currency.
Optimism about better relations with the European Union after a Turkish court released two Greek soldiers pending trial and a banking watchdog's step to limit foreign exchange swap transactions have also helped the lira.
"They are squeezing lira liquidity out of the system now and pushing interest rates higher," Cristian Maggio, head of emerging markets strategy at TD Securities.
"Rates have gone up by 10 percent ... The central bank has not done this through a change in the benchmark rates, but they are squeezing liquidity, so the result is the same," Maggio said.
Turkish lira recovers some lost ground Assurance in wake of Pune bank breach brings down the price of the US currency in rupee terms. However, the RBI cannot sell dollars beyond appoint as it is essential to keep the foreign exchange reserves at a comfortable level to finance imports.
Consequently, the value of the rupee has to be left to market forces and is determined by the demand-supply situation. The rupee has depreciated by over 8 per cent over the last year as crude oil prices have been rising and the demand for dollars to finance these imports has gone up.