RBI needs to chalk out a plan

Rupee declines alarmingly

The rupee, which has lost almost eight per cent in value since January 1, is the worstperforming currency in Asia this year. The rise in international crude oil prices is one of the reasons behind the rupee's decline as importers have had to shell out more dollars to fund their purchases. India’s current account deficit, which jumped to 1.9 per cent of GDP in the fourth quarter of 2017-18 from just 0.6 per cent a year earlier, is now expected to widen to 2.5 per cent in FY 2019. This could spell even more trouble for the rupee as the demand for dollars could turn out to be overwhelming. But by far the most important reason behind the fall in the rupee and other emerging market currencies is the tightening of US monetary policy.

Investors attracted by higher yields in the United States have been pulling their capital out of India at an increasing pace over the last few months. Foreign portfolio investors, in fact, took out ~297.14 billion in May, almost a doubling of outflow compared to ~155.61 billion in April. But the fact that the American central bank expects to raise interest rates further this year suggests that more pain could be in store.The government, as well as the Reserve Bank of India, which recently raised domestic interest rates in response to rising external economic risks, may need to think out of the box to avoid a crisis similar to the taper tantrum of 2013.

The Indian Express, June 29