As if the slowdown in the economy, negative growth in industrial output and a stubborn inflation were not enough headaches for a besieged government, trouble is brewing on the foreign exchange front with the incessant slide in the rupee, which is recording new lows by the day. A fall of 22 per cent in four months — from Rs. 43.95 in end-July to Rs.53.72 on December 14 — is something that should set alarm bells ringing. In the last month alone, the rupee depreciated by 8 per cent relative to the dollar. A combination of domestic and global factors appears to be behind this slide. Inflation has been ruling at over 8 per cent for the better part of the last two years and strangely, the rupee, defying the laws of economics, was either holding steady or appreciating marginally during the same period. Rising inflation tends to trigger currency depreciation. In that sense, the rupee probably had it coming. The forex market has its own explanation for the fall. Importers, having been lulled into complacency by the rupee's appreciation earlier, are rushing to cover their exposures, thus driving up dollar demand. Exporters are said to be holding on to their earnings in the hope of a further fall in the rupee. And then, there is the turbulence in the global financial markets and the strange sight of funds gravitating to the dollar despite the troubles in the U.S. economy. The markets obviously believe that the dollar is safer than the euro, given the economic problems of the euro zone.
The Reserve Bank of India has, so far, responded to the sliding rupee with no more than a symbolic intervention in the market. It really can afford to do no more than that, given the country's foreign exchange reserves of $306 billion. That may not be enough to defend the rupee, especially when the intervention comes as a reaction to global factors. The central bank also has to keep in mind the widening current account deficit, while formulating the strategy for market intervention. The RBI apparently thought it prudent to keep a close watch and tweak policy here and there to ease fund inflows, reserving its firepower for use should the situation deteriorate. With the macroeconomic numbers unlikely to improve in the next few months — if anything, they might worsen — the rupee appears to be really up against it. While exporting industries such as information technology, gems and jewellery, and textiles will be happy, consumers are likely to feel the pinch. The higher cost of imported inputs across a swathe of products will cause an increase in their end prices, especially in the case of fuels. A rise in petrol prices could well be on the cards as a New Year gift to consumers.