Rupee vs dollar: Why the rupee is likely to depreciate even more in coming days

Other than India, other Asian currencies have also been hit. The yuan is the lowest in 18 months. There are some very basic fundamental factors which will impact India like high crude prices, exports, trade deficit, FII selling, . Is there anything that can be done to mitigate this impact? What is the role you now see the play?
In the Indian context, falling rupee makes us a little more vulnerable than other Asian economies because we import almost 80% of our crude and crude prices are not coming down at all. So that is putting pressure on our current account deficit and that clearly is a sign of an economy which is not doing particularly well on the external front. That makes people more nervous and which is why the rupee is perhaps likely to depreciate even more in the coming days.

As per RBI’s own calculations, almost every 5% depreciation in the rupee adds about 10-15 bps to the inflation. So given the fact that inflation is already very high and the RBI has been quite late to play catch up as far as raising interest rates to tackle inflation is concerned, going forward the outlook is not too good for the Indian rupee.

There is nothing much that the Reserve Bank can do except to ensure that the spikes are not as sharp as they were on Friday when the rupee depreciated by about 57 paisa and on Monday, again a little over 50 paisa. They can only try and smoothen the decline and fortunately for us we have forex reserves though the reserves have also fallen to less than $600 billion.

So, as of now, there is no need to hit the panic button but there is certainly need for us to be concerned particularly because we have been behind the curve as far as inflation is concerned and there is a global risk off and on.

What happens from here on? Some estimates talk about the rupee falling as much as 79 to a dollar. How does that impact us overall as a nation, apart from students, travellers, etc?
It is fairly difficult to say where exactly the rupee will settle but I do feel that the RBI will intervene if it starts falling very rapidly. The whole attempt of the RBI would be to reduce volatility. How does it impact us? The biggest impact really would be on inflation. At a time when inflation is already very high, we saw March figures of 6.95-7% and in April, inflation is expected to have touched 7.5%.

At a time when inflation is already so high, any further depreciation in the rupee is going to hit us primarily through the inflation route and that is going to be catastrophic for our country as a significant portion of the population live below the poverty line. My biggest worry is that if we have inflation at this level, then the RBI’s like in the past, would not be able to do very much. They were behind the curve and as a result of which we have inflation. The interest differential between the US and India would have been breached to some extent because the RBI has raised interest rates to some extent but even so, the differential remains wide because the Fed is expected to raise interest rates further at its forthcoming meetings. The biggest impact will be on inflation and in terms of human welfare.

The rupee sometimes becomes a political issue. For some reason, the rupee is seen as a symbol of the Indian economy’s strength. Can anything be done seriously to intervene if a lot of the factors are global?
As I said, luckily we have the kind of forex kitty which we did not have in the past. It was over $600 billion and now it has come to be just a little short of $600 billion. So we have the forex reserves but whether it makes sense to intervene and try to prevent the underlying trend is a big question mark. Normally, no central bank intervenes against the market. What they do try to do is ensure that the volatility is reduced and to that extent, the RBI has been intervening.

Fortunately for the RBI, this comes at a time when the RBI is consciously trying to tighten monetary policy also. So, there is no conflict but the biggest worry is not just in terms of volatility and that is not doing good for either exporters or importers, the bigger worry really is what it does for inflation. When the rupee depreciates, given the fact that we still import large volume of oil, that will impact oil price and directly as well as indirectly – through transport – we are going to see the impact of that on inflation. It is never good news because inflation will start hitting not just our export competitiveness but also our growth potential. So sharply depreciating rupee is not good news at all.