It said that like most emerging market currencies, the rupee was buffeted in 2020 by substantial swings in global risk appetite and associated shifts in capital flows.
India’s goods trade surplus with the US was USD 24 billion in 2020, broadly in line with its average level since 2014. India also ran a USD 8 billion services trade surplus with the US in 2020, said the India section of the Treasury Department report that reviews developments in international economic and exchange rate policies.
“India has been exemplary in publishing its foreign exchange market intervention, publishing monthly spot purchases and sales and net forward activity with a two-month lag. The Reserve Bank of India (RBI) states that the value of the rupee is broadly market-determined, with intervention used only to curb undue volatility in the exchange rate,” the Treasury said.
While the RBI frequently intervenes in both directions, it purchased foreign exchange on net in 11 of the 12 months of 2020, with net intervention reaching USD 131 billion, or 5.0 per cent of the GDP, it said.
Purchases slowed following the onset of the pandemic when India experienced large capital outflows and in response, the RBI engaged in net sales in March 2020 as the rupee weakened.
As portfolio inflows resumed and foreign direct investment remained strong during the second half of 2020, the RBI’s net purchases accelerated.
The RBI’s purchases have led to a rapid rise in total reserves. As of December 2020, foreign exchange reserves totalled USD 542 billion, equivalent to 21 per cent of the GDP and 219 per cent of short-term external debt at remaining maturity, it said.
“Like most emerging market currencies, the rupee was buffeted in 2020 by substantial swings in global risk appetite and associated shifts in capital flows. After depreciating 6.0 per cent against the dollar during the first half of 2020, the rupee partially recovered and ended the year 1.7 per cent lower against the dollar,” the Treasury said.
On a nominal and real effective basis, the rupee weakened 6.9 per cent and 3.2 per cent respectively over the four quarters through December 2020.
The Department of Treasury in its report has asked Indian authorities to allow the exchange rate to move to reflect economic fundamentals, limit foreign exchange intervention to circumstances of disorderly market conditions, and refrain from excessive reserve accumulation.
“As the economic recovery takes hold, the authorities should continue to pursue structural reforms that can help lift productivity and living standards, including greater openness to foreign financial flows and financial sector deepening, which can further support economic growth,” it added.