RBI’S STEPS TO ARREST SLIDING RUPEE HAVE LIMITED IMPACT

Declining value of rupee against dollar, which has touched a historic low recently, has become a major economic issue prompting both, the Reserve Bank of India (RBI) and the Government, to step in to arrest the fall. However, it is doubtful whether the initiatives taken by RBI and the Finance Ministry will be able to help in containing the decline of rupee, the reasons for which are global as well as domestic. As regards the factual position, the rupee touched its lifetime low of 56.38 to a dollar on May 24, 2012. Since beginning of March, rupee has lost over 13 per cent and 11 per cent since the presentation of Budget on March 16 in the face of withdrawal of funds by foreign investors from stock markets and other reasons. A cross country analysis reveals that Indian currency during the one-year period ending May 23, 2012 declined by 23.8 per cent. The fall in Brazilian real against dollar during the same period was 25.5 per cent, followed by South African rand (19.6 per cent), Mexican peso (19.2 per cent), Argentinian peso (9.4 per cent) and Indonesian rupiah (8.9 per cent). In the backdrop of cross-country analysis, it cannot be said that global factors were solely responsible for the fast declining value of Indian rupee. These factors only played a partial role in influencing the value of the domestic currency, especially in terms of the sudden withdrawal of funds by the Foreign Institutional Investors (FIIs) to the tune of Rs 1,500 crore since April and rising demand of dollars to fund oil imports. Among the domestic factors, the persistence high inflation, continuing slowdown and rising current account deficit (CAD) are impacting the value of rupee. The inflation, represented by the wholesale price index, rose to 7.23 per cent in April from 6.89 per cent in the previous month, while retail price inflation (CPI) entered double digits of 10.36 per cent in April from 9.38 per cent in March. RBI Governor D Subbarao too had said, “Core inflation, which is nonfood manufacturing (items) has remained below 5 per cent. So in our next midquarterly review (due on June 16), we will take into account the numbers which have come after our midApril statement. We will consider how the inflation scenario has evolved. We will take into account the growth statistics and take a decision”. The current account deficit, which is the difference between inflow and outflow of foreign exchange, rose to 4 per cent of GDP at the end of December 2011, as against 3.3 per cent during 201011. As regards the economic growth, it slipped to 6.9 per cent during 2011-12 from 8.4 per cent in the preceding two years. The government, for the current fiscal, has projected the growth rate at around 7.5