STATSGURU:

RBI lets rupee find its own level

THE RUPEE’S 11 per cent year-to-date decline against the US dollar should not come as a surprise, considering that other emerging market currencies (Chart 1) are also witnessing a rout. Investors are particularly harsh on countries that run current account deficits (CAD).

India runs twin deficits. Its CAD of 1.9 per cent of gross domestic product in the fourth quarter of fiscal 2017-18 widened to 2.4 per cent in the first quarter of 2018-19. Under a similar situation in the past, the Reserve Bank of India (RBI) had intervened, or supplied dollars to stabilise the currency, if not to protect a level. What is surprising in the current episode is that the central bank did not intervene as much and let the rupee depreciate to catch up with its trading partners as shown in Chart 2. Undoubtedly, the rupee has remained overvalued against its trading partners and letting some of the steam off would be helpful for the export sector. But it also pushes up inflation through costlier imports and makes servicing foreign loans expensive.

The RBI has started intervening in the currency markets in the past few sessions, say currency dealers. Taking a cue, exporters too are now bringing out their dollars, which indicates that the rupee could get support around the present levels. But dealers also say that it is unlikely the rupee would strengthen back to the 60s any time soon.

The situation may change if the government and the RBI decide to raise dollars through special deposit schemes for non-resident Indians, like what was done in 2013, to fight a sharp rupee fall.