“The RBI is very keenly watching the exchange rate,” Union finance minister Nirmala Sitharaman said on July 1.

The Centre, however, maintains that currencies are weakening all around the world and not just in India. “A prolonged conflict may still trigger further selling-we estimate around $7-8 billion outflows in such a scenario, similar to the levels seen during the global financial crisis,” HSBC Global Research said in a research note in May. The continuing war in Ukraine will only aggravate such selling. FIIs sold shares worth Rs 2.14 lakh crore in Indian markets between April 1, 2021, and June 10, 2022, as per National Securities Depository Limited data. When the bond yields (return on a bond’s interest payments) go up in the US and UK, FIIs find those markets more attractive, which explains the flight of capital back to those markets.

The other reasons are the sharp sell-offs in the equity markets by foreign institutional investors (FIIs) and the high prices of crude, which stood at $111.5 a barrel for Brent on July 4. In June, the RBI thought it fit to raise the repo rate again, by another 50 bps. This was after the RBI, in a surprise move prompted by the alarming 7.79 per cent registered in April, raised the repo rate, or the rate at which it lends to commercial banks by 40 basis points (bps) on May 4. In May, retail inflation was 7.04 per cent. In India, inflation has breached the Reserve Bank of India-set upper limit of 6 per cent for five consecutive months beginning this January.

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