Re plunges, but RBI is helpless

Re plunges, but RBI is helpless

Sharp depreciation will make oil imports costlier, analysts fear

The central bank is in a bind as selling dollars in the market to stabilise the value of the rupee will tighten the liquidity situation and may also force the RBI to resort to further open market operations.

The fall of the rupee could not have come at a worse time, with the inflation nudging 10 per cent. Analysts say the sharp depreciation will make oil imports costlier. The fall was due to rising demand for the US currency, especially from oil importers and lower participation from foreign institutional investors in the equity market. The parity with the dollar is an all-time low for the rupee after March 2009, in the wake of the 2008 financial crisis. The erosion of the rupee may fuel inflation further making food and fuels costlier.

The rupee has fallen nearly 15 per cent since July this year. Compared to other Asian currencies, the fall of the rupee has been more pronounced since late July, partly due to the country’s widening trade deficit. Unlike most Asian countries, India has long run a trade deficit that reached a four-year peak of $19.6 billion in October.

The currency of every other emerging economy is falling, except the Chinese Renminbi. The currencies of Russia, Brazil and Indonesia too have eroded, but not to the extent of rupee.