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

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

RBI Pays a Stiff Price

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.

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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