Diving rupee

The sharp fall of the rupee against the dollar in a short span of time has taken the Reserve Bank of India and others who have a stake in the exchange rate of the currency unawares. The rupee has lost over 11 per cent  in about three months and last week there was a precipitous decline, taking it to a 30-month low.

It is close to the psychologically important Rs 50 mark and may fall to Rs 52.  The depreciation has implications that go beyond the interests of importers and exporters who are of course directly affected. But these may vary from sector to sector.

The reasons are not specific to India. The economic troubles in the Eurozone area resulting from the sovereign debt crisis has roiled the financial markets, including stock exchanges, all over the world. Indian markets were also badly hit. In a milieu of instability and crisis, the US dollar is a safe haven, in spite of the dark clouds that have gathered over the US economy.

Foreign investors have dumped stocks for the safety of gold and the dollar and it has resulted in run on the rupee. The RBI has expressed its concern over the plunge but has not actively intervened in the currency market. India has a large foreign currency reserve of about $ 318 billion which is a strong cushion. The thinking in the RBI seems to be to conserve it for a more dire emergency which cannot be ruled out if the global situation worsens. An aggressive intervention by the RBI might also affect adversely its strategy to contain inflation which the apex bank considers as the most serious problem now.

Exporters gain from a fall in the external value of the rupee and importers stand to lose. The software sector, which has been going through a bad phase, might be benefitted. But it also faces the problem of declining business in the developed countries on account of the poor economic conditions there.

The plunge happened in too short a time for many exporters to take advantage of it.  It is also possible that a reversal may take place as quickly as the decline.  Importers have been hit and the trade deficit is set to widen. NRI remittances are increasing on account of the fall of rupee and the higher interest rates in Indian banks. In an uncertain scenario keeping the exchange rate stable will be a difficult task.

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