ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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RBI Pays a Stiff Price

Hot Money Worth $34 Billion Will Be Flowing Out of India

A huge amount of dollars will be flowing out of the country in the coming weeks as non-resident Indians redeem the deposits they made three years ago under an ill-conceived special scheme to shore up the external value of the rupee. The new governor of the Reserve Bank of India should resist pressures to devalue the Indian currency.

This article has also been posted in the Web Exclusives section of the EPW website.

A large sum of $34 billion (or approximately ₹2,27,800 crore assuming an exchange rate of ₹67 to a dollar) is due to flow out of India soon. These funds were mopped up in September 2013 amidst a bloodbath that had taken place in the foreign exchange (forex) market at that time when the value of the rupee against the American dollar had come down to an all-time low of over ₹68 to a dollar. The Reserve Bank of India (RBI) had then opened a “swap window” for banks. Through this window, banks could sell dollars to the RBI “spot” and buy them back “forward.”

(Simply put, a spot contract is a contract for buying or selling a currency for payment and delivery on a spot date, usually after 48 hours, whereas a forward contract is one where the terms of the contract are agreed to at present but payment and delivery takes place at a much later date in the future.)

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