Opinion Don’t rush in to prop up the rupee
The RBI’s Monetary Policy Committee is currently holding its last meeting of this year.
Monetary policy should be used to tackle inflation, not defend the currency. 
On Wednesday, the Indian rupee breached the 90 mark against the US dollar. Over the past year, it has fallen by more than 6 per cent against the dollar, and to a much greater extent against other major currencies such as the euro and the pound. This decline seems to have raised concerns in some quarters. However, at the current juncture, intervening heavily in the markets to artificially prop up the rupee will not be an appropriate strategy. Exchange rates are a shock absorber. A weaker currency will help boost exports in a challenging global environment. The temptation to target the rupee around a particular level should be avoided.
A growing trade deficit, coupled with portfolio outflows, is exerting pressure on the rupee. India’s overall merchandise exports contracted by around 12 per cent in October, with those to the US falling by 8.6 per cent as President Donald Trump’s tariffs have impacted competitiveness. With imports surging, gold imports also soared to $14.7 billion in October, as against $4.9 billion a year before, and India’s trade deficit surged to a high of $41.7 billion. This widening goods trade deficit has come at a time when capital flows into the country are coming under pressure. In fact, since the beginning of this year, foreign portfolio investors have withdrawn around $17 billion from the markets, while net inflow of foreign direct investment stood at $2.9 billion in the second quarter. As per data from the RBI, in the first half of the year, there was a depletion of $6.4 billion in the foreign exchange reserves. Market sentiment has also been weighed down by the continuing uncertainty over the India-US trade deal.
The RBI’s Monetary Policy Committee is currently holding its last meeting of this year. Monetary policy should be used to tackle inflation, not defend the currency. Moreover, in the current environment of low price pressures — the consumer price index was at 0.25 per cent in October — there is even less concern over the impact of a weaker currency on inflation. Further, any intervention in the currency market will also have implications for liquidity in the economy. The central bank should allow for a calibrated depreciation of the currency, smoothening out the excess volatility. At the same time, the government must firmly push ahead with policies to raise productivity and improve export competitiveness. It must also seal the long-pending trade deals, which will help improve market access.
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