Falling rupee has become a great worry for the country as it hit a life-time low of 58.16 against dollar on Monday meaning imports, particularly oil and gold, have become costlier further worsening already high current account deficit (CAD).
CAD touched a record high of 6.7 per cent of GDP in December quarter of last fiscal, which is likely to be in the range of 5 per cent for the 2012-13 fiscal. But experts say a CAD in the range of 2.5 per cent is sustainable.
Negative factors like heavy dollar demand coupled with slowdown in capital inflows put pressure on the rupee, as a result, it sank by a staggering 110 paise to life-time low of 58.16 against dollar forcing the Government to say the panic is unwarranted.
“If you see weakening of all currencies vis-a-vis dollar, rupee is also not unaffected in that sense. But I think this panic (in) the market which is unwarranted,” Economic Affairs Secretary Arvind Mayaram told reporters on sidelines of a workshop here.
This, he said, started off with misinterpretation of what Federal Reserve Chairman Ben Bernanke had said regarding Quantitative Easing (QE) recently. “They have now clarified that this (Quantitative Easing withdrawal) is not imminent; neither is it going to be something which will happen quickly. I think this will settle down in a while. We should not worry but we are watching the situation closely,” he said.
Forex traders said there were no visible signs of RBI intervention to arrest rupee slide but expectations are high that the central bank will come with restriction on banks overnight.
Attributing decline in rupee to high CAD and erratic capital flows, Chairman of Prime Minister's Economic Advisory Council (PMEAC) C Rangarajan said whenever foreign investment is not steady, there is pressure on currency.
“I think the point is really that the fluctuation in the rupee is because of fluctuations in the capital flows. When capital flows revert (increase), I believe the value of rupee will strengthen,” he said.
Commenting on the rupee fall, Chief economic adviser Raghuram Rajan said the weakness in rupee could be a temporary phenomenon. Rajan said India has large CAD, and currencies of emerging markets with large CAD have depreciated more.
“This could be temporary phenomenon. But again let me reiterate that the Government is not supportive of weakening of rupee and we would like more stability,” he said.
Commenting on the rupee fall, Planning Commission Deputy Chairman Montek Singh Ahluwalia said the Reserve Bank is the best authority to deal with the issue.
“You know this is something left best to the RBI to comment on. I would not make forecast. People speculate and they hedge. I think they have to make up their mind what they want to do,” he said.