Dinesh Kamath's Editorial 'Save the Rupee' that was published in Newsband

Save the Rupee

The rupee is in trouble. On Thursday, the currency weakened past 69 intraday against the U.S. dollar, an all-time low. The rupee has lost almost 8% in value since January 1. Rupee has become the worst-performing currency in Asia.

The rise in international crude oil prices is one of the reasons behind the rupee’s decline. There could be more trouble for the rupee as the demand for dollars could turn out to be overwhelming. The dollar index is up about 7.5% since February. The rise in global trade tensions amidst the ongoing trade war could be another factor. The most important reason behind the fall in the rupee is the tightening of U.S. monetary policy.

Investors attracted by higher yields in the United States have been pulling their capital out of India at an increasing pace over the last few months. The fact that the American central bank expects to raise interest rates further this year suggests that more pain could be in store. The government, as well as the Reserve Bank of India, which recently raised domestic interest rates in response to rising external economic risks, may need to think how to avoid a crisis.

Some of the European currencies too are going down against the dollar in view of the rising drawing of dollars for purchase of oil at the prevailing international rates. As long as Indian democracy and rule of law prevail there could be no risk for either Indian economy or for Indian rupee.

Currently, the rise of Dollar is once again proving to be an hurdle to Indian economy. 'Dollar is making us dance' making the economists busy searching for solutions. In a way, it is better to let the rupee find its own level unless there is drastic erosion. For too long we have been propping up the rupee. RBI needs to be only vigilant that trade does not get too affected.

The two negative factors for the sliding rupee are namely capital flight from India on the Fed rate being attractive to the overseas investors and the hiking oil prices causing the purchase of dollars on payment. Nevertheless the CAD slowly increases and the FDI has little response on make India call. Trump’s trade war also have its impact on Indian currency.

Five years ago, Dr Rajan had his baptism by fire when he moved to the RBI. He put together a scheme which brought $ 20 billion in NRI deposits. High oil prices and rising interest rates in the US will remain a challenge for the rupee. The other constraint is exports, which remain in a rut at about $ 300 billion. Without structural reforms, the 20% weakening of the rupee in the last four years has not helped them grow. For the moment, the best course of action would be for the government to give the RBI and the MPC a free hand, allow them to raise rates to defend the rupee. Its weakening is also fuelling inflation.