Even as the rupee plunged to a new low of 57.54 against the U.S. dollar in early trade on Monday, the Finance Ministry sought to allay fears of a free fall saying the panic in the market is ‘unwarranted’, and there is no reason for worry as the authorities are watching the situation closely.
Explaining the reason for the sharp slide in rupee value in his interaction with reporters on the sidelines of an event here, Department of Economic Affairs (DEA) Secretary Arvind Mayaram said: “If you see weakening of all currencies vis-a-vis [the U.S.] dollar, the rupee is also not unaffected in that sense. But I think this is panic [in] the market which is unwarranted.”
Dr. Mayaram pointed out that the volatility in the rupee exchange rate on the downside began with the misinterpretation of what U.S. Federal Reserve Chairman Ben Bernanke had stated recently with regard to Quantitative Easing (QE). “They have now more than clarified that this [withdrawal of QE] is not imminent, neither is it going to be something which will happen quickly. I think this will settle down in a while. We should not worry but we are watching the situation closely,” he said.
To the government’s chagrin, however, despite the Finance Ministry’s bold stance, the Indian currency collapsed to its historic low at 58.16 against the greenback at close, shedding a whopping 110 paise during the day’s trading.
If the downward volatility persists, not only will all imports turn costlier, it will also lead to a further widening of the current account deficit (CAD).
Fresh worries on inflation front
Worse still, a weak rupee gives rise to fresh worries on the inflation front and raises the prospects of the Reserve Bank of India not going in for the much-anticipated rate cut on June 17.
Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan pointed out that apart from the high CAD, it is the erratic flow of foreign capital that puts further pressure on currencies.
“I think the point is really that the fluctuation in the rupee is because of fluctuations in the capital flows. When capital flows revert [increase], I believe the value of rupee will strengthen,” he said.
At present, even as FII (foreign institutional investor) inflows into the equity market remain positive, there has been a surge in outflows from the debt market in recent days and it is the flight of dollar from the country coupled with heavy dollar buying by importers that has further weakened the rupee.
Chief Economic Advisor Raghuram G. Rajan viewed the depreciation in the rupee as a temporary phenomenon. “India has large CAD, and currencies of emerging markets [with] large CAD have depreciated more. This could be temporary phenomenon. But again let me reiterate, [the] government is not supportive of weakening of the rupee and we would like more stability,” he said. Alongside, however, he pointed out that the government does not have specific level in mind where the rupee should be at.
Dr. Rajan also maintained that the medium-term measures which have been taken in the past will continue and that will help rupee find a level consistent with sustainable growth. In recent weeks, the government and the RBI have put in place a number of steps to rein in the demand for gold so as to curb imports of the yellow metal, which has been a prime reason for the widening CAD.