Rupee volatility declines to multi-decade low

Subject : Economy

Section: External Sector

Key Points:

The volatility of the rupee has touched multi-decade lows in June. (volatility is a measure of the variation in the value of any variable/parameter, here it is the forex rate)
The stability of the Rupee within the 81-83 band indicates two things:
- The monetary policy environment and economic outlook support the exchange rate determination.
- RBI has been effective in keeping Rupee within the range, even as it builds its forex buffers.
On the economic outlook front, a positive bias for the rupee can also be attributed to improved growth prospects, healthy capital inflows, and lower oil prices.
On the monetary side, while the Monetary Policy Committee has chosen a pause on rates, the Fed has indicated chances of another rate hike. Together these expectations are holding the pricing of the currency pair in stable range.
FPI flows too have remained robust during this period.
If China’s renminbi/yuan is considered, Rupee has appreciated against it as China has recently cut its rate against the Fed move of holding the rate. This may pose a risk for India on the trade front, as a stronger rupee vis-a-vis Yuan will drive Chinese imports into India.