Expert Zone

Straight from the Specialists

Raghuram Rajan and the rupee

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

With Raghuram Rajan taking over as the governor of the Reserve Bank of India (RBI), it’ll make for a change in the central bank’s policy perception.

His predecessor Duvvuri Subbarao used conventional methods and got no results. It is likely Rajan will opt for innovative means and his initial steps are already showing results. It’s evident that the complex problems of today demand out-of-the-box solutions.

The rupee, beaten down by inflation and tortured by the current account deficit, had become weaker over the years. It got worse when the U.S. Federal Reserve announced tapering of quantitative easing that would have reduced (if not reversed) FII investment and made it difficult to fund the current account deficit.

When the rupee crossed 60 to the dollar and showed no signs of steadying, the RBI responded with its traditional method of squeezing liquidity to check speculation. It then tried to reduce the outflow of dollars due to overseas investments by Indian companies and individuals spending abroad. The result was a further slide, taking the rupee close to life lows of 70 to the dollar. That’s conventional wisdom for you.

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