The rupee's sudden slide has created panic in the business and policy circles, Amitendu Palit, a Senior Research Fellow at the Institute of South Asian Studies (ISAS) said today.
"The major concerns are over whether the almost free-fall will adversely affect the Current Account Deficit (CAD) and inflation," he said in ISAS Brief, a regular commentary on South Asia by the think-tank institute of the National University of Singapore.
There were also concerns over whether a depreciating rupee would increase the fiscal deficit by increasing expenditure on subsidies and jeopardise the repayment schedule for external commercial borrowings (ECBs), he pointed out.
The Indian government has been putting up a brave face assuaging the market, investors and industry about the volatility being short-lived, he noted.
The Finance Ministry and the Reserve Bank of India (RBI) appear largely unruffled by the episode.
Till now, the RBI has not made any major interventions to shore up the rupee by selling US dollars in the open market, except a minor exercise on 11 June 2013, said Palit, a former Indian civil servant.
The Finance Ministry, on the other hand, appears confident about the rupee stabilising over the next two-three months.
Palit pointed out that on June 11, 2013, the rupee dropped to 58.98 against the US dollar (USD) before pulling back a bit. Exactly a year ago, on June 11, 2012, the rupee was at 55.24 against the USD. The year-on-year decline marked an annual depreciation of 6.7 per cent.
The fall, however, has not been gradual. Rupee had fallen to a low of 57.21 against the USD on June 27, 2012. It had steadily recovered thereafter to climb to 51.61 against the USD on October 5, 2012, he said.
After remaining range-bound at 52.0-54.0 against the USD for more than six months, it weakened to 55.03 on 20 May 2013. Since then, the drop has been rather sharp over the last three weeks, Palit pointed out.
While much of the hue and cry has been over the rupee's fall against the USD, it has depreciated by an almost equal amount (6.8 per cent) against the Euro and to a greater extent against the UK pound (12.0 per cent) during the last one year.
Surprisingly, however, it has appreciated by 13.6 per cent against the Japanese Yen during the same period, he noted.
Indeed, when looked at against a basket of major currencies as revealed by the RBI’s nominal effective exchange rate (NEER) indices (both 36-country and 6-country), the depreciations during May 2012-May 2013 are almost minimal, he said.
This might explain why the government and the RBI are not unduly worried over the development, said Palit.
Nonetheless, a sharply sliding rupee does have its downsides particularly if the fall continues unabated, Palit said, adding that most of the concerns expressed in this regard were valid, he said, pointing to the adverse impact on crude oil imports and widening trade deficit.
What policymakers would be hoping was for the Foreign Institutional Investors (FIIs) to retain faith in the Indian economy and remain net buyers of Indian equities to ensure regular inflow of dollars.
"That, however, cannot happen in vacuum and would require some policy action. If Non-Resident Indian (NRI) bonds take time to be finalised, the government can always contemplate more concessions in FDI by raising ceilings on long-term foreign investment in specific sectors such as telecom and insurance," he suggested.
He also pointed out that the RBI could affirm its faith in the country's long term-growth outlook by cutting interest rates for reviving investment, instead of refraining from doing so on the ground of a falling rupee increasing inflation.
The depreciating rupee was also an opportunity for several exporters to increase their overseas business and policy measures for encouraging exports was another feasible option, he said.
