As if the economic policy managers did not have enough problems coping with the Indian economy in dire straits, the sharp rupee depreciation this week comes as the latest one. Key policy makers over the last couple of days have expressed concern over the developments but a consensus seems to be lacking within the policy establishment over how to deal with this phenomenon. Chairman of the PM’s economic advisory council and former RBI governor C Rangarajan said Saturday the central bank should intervene to check the depreciation of the of rupee that has fallen to Rs 51.30 against the US dollar, the lowest in 32 months. “The RBI should intervene when volatility in exchange rates is high”, he added. This comment was in contrast to the view expressed by RBI Deputy Governor Subir Gokarn, who said it might be risky for the RBI to use forex reserves to defend the rupee given the volatile global economic situation. Some analysts have criticized the RBI stance on the grounds that by not giving any signals to defend the rupee it was fuelling the fall of the rupee. Meanwhike, Finance Minister Pranab Mukherjee said Saturday the RBI was “keeping an eye” on the situation. “The RBI is keeping an eye on it (depreciation of rupee). They are watching the situation at the appropriate level,” he said. On the question about what would be a comfortable rate of exchange and the likelihood of intervention by the central bank, Mukherjee said, “I’m not guessing anything and I’m not finding what is a comfortable level”. There has been speculation that the RBI has asked public sector banks to release dollars to arrest the fall of the rupee. Although several emerging market currencies have fallen, the rupee is the worst performing currency in Asia falling by 14% this year and from its high in July. Analysts are predicting that the rupee may fall further to test its lows of Rs 52 hit in 2008. The rupee depreciation is being exacerbated by the drying up of inflows into India, both in the stock markets through FIIs and in projects via FDI. This will have an adverse impact on oil prices in India by pushing them up further. Moreove, all imports will become costlier.
Chandigarh Tribune
