Chief Economic Adviser V. Anantha Nageswaran today said aggressive monetary tightening by the U.S. Federal Reserve has historically led to depreciation of the Indian rupee against the dollar, while maintaining that this time the currency reaction is “moderate”.

Being asked about the depreciation of the rupee against the greenback on the sidelines of the Fintech Festival India in New Delhi today, Nageswaran says, “You have to look at the history. Whenever the Federal Reserve is on an aggressive tightening, this type of currency reaction happens historically. This time it is far more moderate.”

“You look at the Japanese Yen, and the British Pound. They all have depreciated much more against the U.S. dollar. The RBI is managing the monetary policy and has announced liberalised rules to attract inflows. We have also raised the import duty on gold,” Nageswaran says.

Rupee on Tuesday breached the psychological level of 80 per dollar. It may be noted finance minister Nirmala Sitharaman on Monday attributed the depreciation of rupee to global factors like the Ukraine crisis, soaring crude prices, and financial tightening in the global economy, in a written reply in Lok Sabha.

She also addedthat the foreign portfolio investors (FPIs) have withdrawn $14 billion from the Indian equity markets so far in the current financial year, owing to the monetary tightening in the advanced economies.

“Global factors such as the Russia-Ukraine conflict, soaring crude oil prices and tightening of global financial conditions are the major reasons for the weakening of the Indian rupee against the U.S. dollar. Currencies such as the British pound, the Japanese yen and the Euro have weakened more than the Indian rupee against the U.S. dollar and therefore, the Indian rupee has strengthened against these currencies in 2022,” Sitharaman says.

“Monetary tightening in advanced economies, particularly in the United States of America, tends to cause foreign investors to withdraw funds from emerging markets. Foreign portfolio investors have withdrawn about $14 bn from Indian equity markets in FY 2022-23 so far,” Sitharaman adds.

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