The sharp fall in the value of the rupee against the dollar in the last one month has left policymakers worried, even as the Reserve Bank of India (RBI) says the fall in the currency is due to global changes and nothing specific in the country is driving the fall. The issue is likely to come up for discussion at the next meeting of the Financial Stability and Development Council (FSDC) this month.
A source in the council confirmed that the sharp fall in the rupee was a concern and would be discussed at the next meeting.
In the last two months, the rupee has weakened by 11.52 per cent, while it has lost 7.75 per cent since September, against the dollar. Such a sharp decline in the currency was last seen in August-October 2008, when the world financial markets were facing a crisis.
|
WOES OF A WEAK RUPEE | |||
| Rs/dollar | US dollar index | Rs/Euro | |
| 1-Aug-08 | 42.35 | 73.42 | 65.69 |
| 24-Oct-08 | 49.98 | 86.44 | 63.04 |
| % chg | -18.02 | 17.73 | 4.03 |
| 1-Aug-11 | 44.08 | 74.26 | 63.62 |
| 2-Sep-11 | 45.79 | 74.76 | 65.29 |
| 7-Oct-11 | 49.16 | 78.73 | 66.05 |
| % chg over Aug | -11.52 | 6.01 | -3.82 |
| % chg over Sept | -7.35 | 5.31 | -1.16 |
| Source: Bloomberg Compiled by BS Research Bureau | |||
Between August and October 2008, rupee had fallen by 18.02 per cent, while the dollar index had risen by 17.73 per cent. However, this time, while the rupee has lost 11.5 per cent in two months, the dollar index has risen by six per cent. This means that the fall in rupee this time has been much sharper than the rise in dollar index and, hence, is seen as a run on rupee rather than just an impact of the global phenomenon.
RBI has not completely ignored the issue, but a serious response from the central bank has yet to come. RBI Deputy Governor Subir Gokarn last week said: “It is a matter of some concern that we depreciate so much in such a short time.” But he watered down the remark by adding: “But we have to put that into perspective, as this is a global phenomenon. There is nothing specific in the country that is driving this process.”
Besides the concern that the fall in rupee has been sharper than the rise in dollar index, a reason for worry has been that the domestic industry has not been able to encash the fall in global prices of commodities, especially crude oil. While in dollar terms the Indian basket of crude oil has fallen 11.18 per cent since August to $101.24, in rupee terms the fall has been only 0.94 per cent to Rs 4,977 a barrel.
For steel making raw materials like coking coal and iron ore, the decline in global prices have been three and five per cent, respectively, but their cost of import in India has gone up three-four per cent in the last one month.
Exporters in the gems and jewellery sector may be getting better realisations for their produce, but the demand in the markets like the US and Europe has been weak.
Sharp fall in rupee is a point of discussion for FSDC as measures to address the issue require the involvement of multiple agencies. RBI is known for its conservative approach in opening up capital account to increase dollar inflow, but liberalising external commercial borrowing norms and portfolio norms need contribution from other regulators too. Some tariff measures may also have to be taken.
Economists, however, have been advising caution and saying the issue needs to be deliberated upon objectively.
JPMorgan Chase Asia Economist Jahangir Aziz said: “While there are concerns about the depreciation of the rupee, policymakers need to study the factors driving the fall in August and September separately and objectively to avoid any knee-jerk reaction.”
Aziz also believes, if global financial conditions stabilise, there is a possibility that the rupee could rebound quickly.
HDFC Bank Chief Economist Abheek Barua said: “If rupee continues to fall further, it will be a worry. However, while discussing the issue, FSDC should remember RBI’s independence in responding to exchange rate volatility. It may take more measures but it cannot guide RBI on rate management.”
