Expert Zone

Straight from the Specialists

The fall of the rupee

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

Since the beginning of September, the rupee has dropped 11 pct, most of the fall coming in the third week. That has inflated the cost of essential commodities, like petroleum products, and inflated debt servicing of external commercial borrowings. Naturally, this has raised questions. Should the RBI have intervened?

Actually, the rupee should have depreciated long time back because of excessive inflation. Going by the real exchange rate, the rupee should have been down to 48 to the dollar right from the beginning of the year. But it did not. That was because the current account deficit was more than covered by foreign investment, mainly FDI.

The sharp fall of the rupee in September is not because of inflation but the flight of FII investment. In two weeks, FII disinvested $1.5 billion, about half from equity and half from debt. The market which had already become very sensitive to fears about recession in the U.S. and the EU debt crisis, collapsed taking the rupee with it.

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