The recent decline of the Indian rupee to a historic low of 86.59 against the US dollar has sparked concerns in financial circles. However, former Reserve Bank of India (RBI) Governor Raghuram Rajan has downplayed the situation, attributing the depreciation primarily to the strengthening of the US dollar rather than domestic economic weaknesses.
A Global Perspective on the Dollar’s Strength
Rajan noted that the dollar has been appreciating against multiple currencies, citing the euro’s depreciation from 91 cents to 98 cents against the dollar in the past year. He characterized the rupee’s fall, from around 83 to 86, as “relatively moderate” in comparison and framed the current situation as a broader “dollar issue.”
According to Rajan, the dollar’s rise is fueled by expectations of reduced US trade deficits under the new administration, alongside safe-haven buying of dollar assets during uncertain times.
Limited Impact on India
Rajan emphasized that when considering the real effective exchange rate (which adjusts for inflation and the exchange rate against multiple currencies), the rupee’s depreciation is not as significant. He even suggested that a slight nominal depreciation could benefit Indian exports, offsetting tariffs imposed on outbound trade.
FII Flows and Global Portfolio Shifts
Addressing concerns about foreign institutional investors (FII) pulling out dollars, Rajan remarked that such fluctuations are natural adjustments. He noted that while India has attracted inflows due to its growth prospects and political stability, recent Chinese stimulus talks have prompted global investors to rebalance their portfolios in favor of China.
No Cause for Alarm
Rajan concluded that the current fluctuations in the rupee and global markets are part of a natural economic cycle and do not warrant undue concern. Instead, he urged focusing on long-term stability and leveraging opportunities like improved export competitiveness.
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