Expert Zone

Straight from the Specialists

Time to get used to a weak rupee

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The fall of the rupee has become politically embarrassing. When the rupee crossed 60 to the dollar, the government and the Reserve Bank of India (RBI) thought it was time to act. The RBI tried to suppress speculation that had exaggerated the rupee’s fall and the government sought to increase foreign resources to fund the current account deficit (CAD).

The RBI complied half-heartedly. “We let our exchange rate be largely market determined, but intervene in the market to smooth excess volatility and/or to prevent disruptions to macroeconomic stability,” Governor Duvvuri Subbarao said in a speech in London.

The RBI raised the cost of borrowing under the marginal standing facility (MSF), narrowed the window for banks wanting to borrow from it, and issued bonds to raise dollar funds – although that missed the target completely. The rupee did harden against the dollar but too little for any comfort.

The government focused on foreign direct investment. That’s how it’s been all along. Foreign assistance and FDI increase the current account deficit and finance it as well. That’s not the case with FII investment. It does not increase CAD and is available to cover it. The current account has almost always been in deficit mainly due to insufficient exports and was funded from FII portfolio investment and external commercial borrowings apart from foreign investment.

Foreign borrowing or foreign investment?

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

The market’s response to the currency measures announced on Monday was a dip in the Sensex. Much was expected after the announcement made over the weekend by the finance minister. What has been actually initiated cannot make much difference either to the rupee or to growth.

Where will the rupee finally rest?

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

For nearly a decade, the rupee has been stable — moving in the narrow range of 44-45 to the dollar. But since August last year, the rupee began to slide and in less than six months was down 23 percent.

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