Rupee’s slide is worrisome; the RBI will have to move in to halt the fall

As India celebrated its 72nd Independence Day, reports of a rupee slump below the 70-mark vis-à-vis the US dollar hit the wires. Several economists have tried to play down the rupee’s southward journey as being more psychological than one having a substantive impact on the Indian economy. However, there is no denying that the rupee’s slide is worrisome and the Reserve Bank of India (RBI) will have to move in to halt the fall. The central bank has already sold dollars worth over $20 billion in the last few months and has enough elbowroom in foreign exchange reserves of over $420 billion. Open market operations alone may not be the answer to the rupee’s slump in a volatile currency market triggered by trade wars, sanctions on Iran and the US-Turkey diplomatic standoff leading to the Lira losing out. The Monetary Policy Committee (MPC) headed by RBI governor Urjit Patel may have to take an urgent call to hike interest rates further and defend the rupee. This should be done over and above 25 basis-point increase already announced by the RBI. Concomitantly, the government will have to swing in with inflation-containing measures to ease the burden on the common people.

Simultaneous measures may have to be unfurled to keep the fiscal parameters intact. For instance, crude oil prices heading for $80 per barrel have already led to a huge spurt in retail prices of diesel, petrol and aviation fuel. Travel has become expensive. Providing succour on petroleum products through cuts in excise duties will have to be considered seriously. Meanwhile, retail inflation is nearing the five per cent mark. Along with fuel prices, people are bound to feel the pinch of costlier products and services that may escalate further and hit kitchen budgets. One needs to keep a watch especially on products produced from imported components and spares that are certain to become dearer.

Those preparing to go abroad for higher studies may have to cough up more rupees to fund their education. Over seven lakh people go to foreign universities, the slide in rupee value will affect a significant number of people. Then, importers have to fork out millions of rupees more to clear their bills, but exporters will go home happy with fatter bank balances. The delay in realising export earnings could be a possibility as exporters may like to maximise their returns. Importers will have to take longer covers and hedge to partially negate the impact. On the brighter side, remittances from non-resident Indians and Indian workers getting paid in dollars may increase thereby blunting some of the adverse impact the rupee fall would have.

The union government and RBI should be worried given that the rupee has emerged as the worst performer amongst its peers like Turkey’s Lira, South African Rand, Russian Ruble, Brazilian Real and Argentine Peso. If one were to go by RBI data, the rupee may still be considered overvalued by 15 per cent against an aggregate of 36 currencies’ Real Effective Exchange Rate (REER). Against six currencies, this over-valuation has been pegged at 23 per cent. There are officials who believe that natural depreciation is better than that designed by the central bank. While political bickering is expected over the rupee fall — Congress president Rahul Gandhi now and BJP members during UPA rule — the matter should be left to the RBI and the economists to deal with. From the macro-economic perspective, the combined impact of the surge in oil prices, trade wars, costlier products and inflation in the context of rupee fall would be huge. Prime minister Narendra Modi will have to set clear goal posts on the rupee to manage macro-economic parameters more judiciously.