The current global world order is at a critical junction. The Covid-Pandemic and Russia’s ‘Special Operation’ in Ukraine have brought the world to the post-World War 2 moment. As the world was realigning itself in the post-war condition, the uncertain future also intensified the present regrouping of the international trade and economy. The impact of this geopolitics and economic overhaul has started to reflect in the international transactions and countries are struggling to maintain their currency downfall in this highly globalised world.
Euro equalizes Dollar
According to the reports, for the first time in 20 years, the value of euro and dollar have been equalized. Economist Michael Hudson, speaking on the downfall, said that the US-led sanctions war, aimed at separating Europe from Russia and keeping it dependent on the US, is making Europe an “economic dead zone”.
The United States and its European satellites are trying to fight to prevent an inevitable break away they cannot prevent. As a result of the sanctions and high energy costs, Europe will come at par with Asia in industrial capacity.
According to a report, about 40% of Europe’s natural gas is supplied by Russia. The economic sanctions against Russia have slowed down the gas supply to Europe and energy crunch has further downgraded industrial growth of the region. As the Europe is still finding the alternative of Russian gas, traders are expecting a lower output in industrial growth and the business sentiment in whole Europe has decreased down to zero. In an effort to intensify economic war on Russia, US led European countries have axed their own legs.
As the world is moving towards the recession, investors mostly put their money in the safest deposit and that for obvious reason is the US Federal reserve. The geographical isolation, economic stability and secure currency value strengthen investors’ position in the US economy. Further inflation in the United States has increased the case of increasing interest rates by the country’s central bank and investors are running towards America. In this case, American dollars are strengthening and the rest of the currencies are on a freefall spree.
RBI’s effort to stop the free fall of rupees
Amidst this volatility, RBI is taking strong measures to control the value depreciation of rupees. As in the case of uncertainty, investors try to infuse their money in dollars due to the stability and security, it is very important for the country to control dollar withdrawal and ensure the dollar income in the India market. So, to ensure stability in dollars and rupees transaction RBI has come up with a graded response.
Exemption from (CRR) , (SLR) Incremental FCNR(B) and NRE Term Deposits
At present, banks are required to include all Foreign Currency Non-Resident (FCNR) Bank and Non-Resident External (NRE) Rupee deposit liabilities for computation of Net Demand and Time Liabilities (NDTL) for maintenance of CRR and SLR. It has been decided that with effect from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022 will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilised up to November 4, 2022.
Interest Rates on FCNR(B) and NRE Deposits
At present, interest rates on FCNR Bank deposits are subject to ceilings of Overnight. In case of NRE deposits, as per extant instructions, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits. It has been decided to temporarily permit banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7, 2022. This relaxation will be available for the period up to October 31, 2022.
External Commercial Borrowings (ECBs)
Under the automatic ECB route, eligible borrowers are allowed to raise funds, without approaching the RBI, as long as the borrowing is in conformity with the prudential parameters of the ECB framework such as all-in cost ceiling. It has now been decided to temporarily increase the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion.
The above mentioned measures have been taken to ensure the inflow of dollars and downgrade the outflows. Further, measures have been taken to internationalize the Indian Rupees. In a circular dated July 11, 2022, the Reserve Bank of India has emphasized for the invoicing, payment and settlement of exports and imports in Indian Rupees. The graded response of RBI will ensure the rupee’s stability in the currencies downfall scenario and will help in stabilizing dollars trade in the international market.
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