The rupee has recovered by 142 paise in Friday?s trade after RBI blocked the opportunity to play around in the rupee-dollar exchange market for exporters, companies and banks on Thursday evening. The currency markets will watch with interest if the restriction puts the rupee back closer to 50 to a dollar, its expected long-term value. If it does, the RBI gamble to cut fluctuations in the currency derivatives market will have paid off. If it doesn?t, if the rupee slides further, RBI will have to intervene with larger fire-power. It doesn?t have the reserves to do so and bringing in physical controls will be seen as hugely retrograde for a currency that is quite near to a full float. The estimated $1bn RBI sold on Thursday has added about R5,400 crore to the economy, almost equivalent to a cut in CRR. If RBI sells any more dollars, this will only add more to the rupee price level. Yet the economy also imports inflation as the rupee falls, in which case the balance that RBI will seek is to decide which one will hurt the economy more. Since it has held back from rate cuts and has not lowered its inflation projection from 7% in March, it must be assumed that RBI would rather stay away from further interventions to arrest the rupee?s slide than risk higher inflation.
In any case, the depreciation in the value of the rupee by 17% to the dollar over its level on August 5, 2011, the day on which the US debt downgrade happened, is largely due to the fundamental problems that have emerged in the Indian economy, allied with reckless comments like those from former finance minister Yashwant Sinha?who recently said India does not need foreign capital. So, cautious steps by the bank are necessary at this juncture. The fall in the exchange value of the rupee will mean some painful adjustments in the economy, mostly among the capital goods importers. But any move to avert adjustments simply pushes them onto those more vulnerable like the small investors. That will be disastrous.
