Exchange rate driven by capital flows, says RBI

  1. According to Reserve Bank of India Deputy Governor,India’s foreign exchange reserves are borrowed reserves and not built out of export surplus.This means that exchange rate dynamics in India is driven by capital flows rather than current account balances.
  2. Current account includes export and import of goods and services while Capital account includes inflow and outflow of capital, including foreign investment, gold and foreign exchange reserves.
  3. He also added that RBI’s intervention in the foreign exchange market is aimed at curbing sudden turbulences in the market and not backed by economic fundamentals.
  4. This statement came as the rupee has weakened to its lowest level due to further escalation in US-China trade war as both sides have increased tariffs further. 
  5. The deputy governor has also acknowledged that global economic scenario is not very encouraging.He observed that growth in developed countries remains sluggish and emerging economies such as China and India appears to be facing challenges.
  6. The deputy governor also said that every country favours exports except when the terms of trade are deteriorating because it contributes to domestic employment and growth.But there is a dislike for imports because the country loses employment, growth and foreign exchange.
  7. However,if all the trading countries impose retaliatory tariffs in the interest of their respective countries,it becomes a negative-sum game affecting global welfare and welfare of individual nations to a great extent.