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RBI forex controls and Rupee value

Last week we looked at the effect of RBI's rate controls on inflation during Mr Rajans tenure. Rajan's monetary policies did help in bringing down inflation, but there has been criticism about RBI being late in late in cutting interest rates for the entire 2014 year while inflation was low.

This week we will look at foreign exchange and gold reserves maintained by RBI and the value of Rupee as opposed to the Dollar. On the left axis we have total foreign currency assets, gold held by RBI alongwith total notes issued in market (including notes with public and held by banks) and Special Draw Rights (SDR , explained shortly) in billion rupees. On the right axis we have INR-USD spot rate(the trading price). Foreign currency assets and gold reserves held by the RBI help in regulating the currency price. Here's a speech from ex-RBI chief Dr YV Reddy on the importance of Forex Reserves.

While Forex reserves have increased gradually, Gold reserves have been maintained at level. This did facilitate in Rupee strenthening in early 2014. However despite increasing reserves rupee kept falling until Feb 2016. This is when the RBI dug into Special Draw Rights with the IMF arresting the rupee plunge. Every country's central bank (RBI for India) has to maintain certain amount of foreign exchange assets with the International Monetary Fund(IMF). Here's more on what SDR means. Since Feb 2016 the Rupee value has recovered but at the cost of slightly lower foreign exchange reserves.

Although Mr Rajan has initiated other reforms like conducting audits with banks regarding their non-performing assets and incentivising mobile transactions his successor will have an equally important role to play in meeting current financial challanges and following through with reforms.