Page 486 - ES 2020-21_Volume-1-2 [28-01-21]

External Sector 113

The appreciation of the `, however, was modest as compared with its emerging market
peers, such as Malaysian ringgit, Thai baht, Philippine peso, Chinese yuan, South African
rand, Mexican peso, Indonesian rupiah. Although ` appreciated against US$, it depreciated
against other major currencies between end-October, 2019 and end-March, 2020. It
depreciated by 4.5 per cent, 3.4 per cent and 1.7 per cent against euro, pound sterling, and
yen, respectively.

3.28 After depreciating to its lowest level of `76.86 on April 16, 2020, the ` subsequently
appreciated owing to FPI flows to the domestic equity market and the weakening of the
US$. In terms of 6-currency nominal effective exchange rate (NEER) (trade-based weights),
` depreciated by 4.1 per cent in December 2020 over March 2020, and it appreciated by 2.9
per cent in terms of real effective exchange rate (REER). In terms of 36-currency NEER (trade-
based weights), ` depreciated by 2.9 per cent in December 2020 over March 2020; however, it
appreciated by 2.2 per cent in terms of REER (Figure 17).

Figure 17: Index of 6-Currency and 36-Currency NEER and REER (Trade Based Weight)
(Base Year: 2004-05= 100)

6- Currency (Trade Based Weight) 36- Currency (Trade Based Weight)

NEER REER (RHS) NEER REER (RHS)
66 130
76 120
128 75
64 118
126 74
62 73 116
124
72
Index 60 122 Index 71 114
70
58 120 69 112
118
56 68 110
116 67
54 114 66 108
Jan 2019 Feb 2019 Mar 2019 Apr 2019 May 2019 Jun 2019 Jul 2019 Aug 2019 Sep 2019 Oct 2019 Nov 2019 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 Jun 2020 Jul 2020 Aug 2020 Sep 2020 Oct 2020 Nov 2020 Dec 2020 Jan 2019 Feb 2019 Mar 2019 Apr 2019 May 2019 Jun 2019 Jul 2019 Aug 2019 Sep 2019 Oct 2019 Nov 2019 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 Jun 2020 Jul 2020 Aug 2020 S
Source: RBI
3.29 RBI’s policy on the exchange rate of the rupee has been to allow it to be determined by
market forces, with interventions only to maintain orderly market conditions by containing
excessive volatility in the exchange rate, without reference to any pre-determined target level or
band. In the months following the outbreak of the pandemic, India experienced unprecedented
FPI outflows of US$ 15.92 billion in March 2020, after recording cumulative inflows of US$
1.42 billion in January 2020 and February 2020, with high volatility in the INR. RBI deployed
several conventional and unconventional tools in order to ensure financial stability and orderly
conditions in financial markets and has been largely successful in controlling the volatility
in the ` (Figure 18). Large stimulus by central banks in advanced economies has resulted in
heightened capital flows into emerging markets such as India, causing asset price inflation as
well as stronger local currencies. Judicious interventions in forex markets were, therefore,
required to prevent a large one-sided appreciation in the rupee – as has been done by RBI
(Figure 18).