Rupee wobbles

Should the rupee’s steady fall against the dollar really be worrying the whole country? The matter might not have been such an issue if the Reserve Bank had not intervened in the market precipitately, without success, and drawn attention to its concern and inability to do much. The room for dire prophecies to become self-fulfilling is especially large here. Having failed in its direct attempt, the RBI later tried to talk up the currency by declaring its intention to do the needful to stabilise the rupee. Only this time its declaration lacks credibility, because it is seen to have tried and failed. As much as the central bank denies that it has a floor in mind, it gives the game away every time the rupee goes through some benchmark figure, in this case 45. It is worth asking what is so sacrosanct about a round figure, except a psychological value imparted precisely by the Bank’s actions and pronouncements.

This is hardly to say that the rupee’s steady and by now really rather precipitous fall this year should be no matter for concern at all. But the repeated experience has been that loud action usually makes matters worse than cautious inaction by giving away the Bank’s inability to really make a difference. In this instance, for example, the situation is apparently made worse by exporters hanging on to their dollars in the firm belief that the rupee will fall further. This has compounded a situation created in part by high imports and pricier oil imports this year and by barely trickling in direct foreign investment inflows. But that still begs the question: should the rest of the country, aside from the RBI whose job it is, be worrying its head about the rupee’s fall? Probably not, unless matters come to a pass when interest rates need to rise sharply to arrest the currency’s fall. It is reassuring that both the central bank and the finance ministry seem for now to agree that if there has to be interventionit should be through the sale of dollars rather than an upping of interest rates at this stage.

Higher interest rates could rudely interrupt an economic recovery, which is already coming somewhat into question with poor first quarter company results and a less than promising investment outlook. It is precisely the credit offtake figures which give heart, and if this should get hit by higher interest rates, the economic scene could be seriously clouded. The RBI is trying to mop up liquidity to discourage speculative trading. And as much as it overplayed its hand initially, it has no option but to keep trying to talk the rupee up. It is good for everyone to recognise that so farthe rupee’s fall is not calamitous, though it could become so if it continued indefinitely and even gathered pace. Unless the overall economic picture suddenly begins to look much worse, there should not be too much reason for worry on that score. This is the beauty of the market. Booming imports, which are now fuelling the demand for dollars which in turn is pushing the rupee down, should be checked eventually by the cheaper rupee. In the meantime, exports enjoy a much-needed and sharp recovery after years of languishing. The time to panic is not yet.