The Rupee is experiencing severe depreciation pressure due to adverse trade scenario and FII outflows. Rupee has registered a near historic low of 53 plus against the Dollar on the previous day. In the coming days the currency may touch a new low against the Dollar.
Of course, the immediate reason for the weakening of Rupee is the FII outflow. Foreign investors are extracting negative sentiments from the potential government decision to impose capital gains tax on FII inflows from Mauritius which is tax exempted as per the current Double Taxation Avoidance Treaty.
Already, the RBI has increased the NRI Deposit rates to arrest further depreciation pressure. But the effectiveness of such a contingency measure is very limited given the widening trade deficit and FII outflow trends. Couple of months back, when the Rupee touched 53 plus against the Dollar, the RBI has allowed banks to raise the NRI Deposit rates and as a result the currency has returned back mildly.
Another option for the RBI is to sell dollar in the foreign exchange market. But here also, the central bank’s reserves are not strong enough to make a sound intervention because the foreign exchange reserves are near to its hypothetic safe minimum level. As on April 27, the RBI’s foreign exchange reserve is US$ 295 billion. Already, on Friday, the RBI has made sizable selling of dollar to stop the slide of the Rupee.
All these indicate that the present Rupee slide may not be countered with major policy intervention. Perhaps the most viable option is to encourage FII inflows by postponing the revision of the Mauritius DTAA amendments.