The Indian central bank has usually had an asymmetric response to pressure in the market for foreign exchange, as Ila Patnaik and Rajeswari Sengupta have shown in a recent paper that was presented in the 2021 edition of the India Policy Forum hosted by the National Council of Applied Economic Research.

The actions and future policy options of the Reserve Bank of India (RBI) in recent months can be viewed against this backdrop. The other two are less favourable-a wide current account deficit and being a net commodity importer. Two of them are in favour of India-a sizable stock of foreign exchange reserves and low levels of dollar debt. However, Indian companies do borrow abroad.

The Indian government does not borrow abroad, and has provided foreign investors only limited access to its rupee debt. On this front, India has been very conservative. Rich economies have less reason to do so because they print global reserve currencies as well as have privileged access to the US printing press through swap agreements.įourth, countries in which most of the public debt is held by local investors have less reason to worry than countries in which the proportion of dollar debt is higher. Third, most emerging-market economies have learnt the hard lessons of previous episodes of economic stress to build up a stock of precautionary savings in the form of foreign exchange reserves to deal with sudden balance-of-payment shocks. India has a wide current account deficit right now, as the domestic investment rate is higher than the domestic savings rate.

Countries with current account surpluses have less reason to worry about a sudden withdrawal of foreign capital from their shores. Second, partly linked to the first point is the current account balance of a country. The price of its imports basket has risen more than the price of its exports basket, or a negative terms-of-trade shock. India falls squarely in the second category. The former group has benefitted from rising energy prices while the latter has had to bear costs. First, a lot depends on whether a country or a currency area is a net exporter or importer of commodities.

All foreign currency in indian rupees