Opinion Express View on the Indian rupee: Let it fall

In recent days, the rupee has come under increased pressure, but the Indian currency is no exception. US President Donald Trump’s executive orders imposing additional tariffs on Canada, Mexico and China have roiled markets. On Monday, investor sentiment soured in most markets across the world and major currencies were strained. The Sensex ended the day down 0.4 per cent while the rupee fell to an all-time low of 87.29 against the dollar during the day, closing at 87.19. On Tuesday, some of the lost ground was regained. The Sensex rose 1.8 per cent, while the rupee ended the day around 87.07. Investors are, however, bracing themselves for a period of uncertainty.

It is difficult to see how this trade war will play out. Trump has now decided to delay the imposition of tariffs on both Mexico and Canada for one month after speaking with the leaders of the two countries and extracting concessions. However, on Tuesday, China announced tariffs on select imports from the US beginning February 10. Trump has now indicated that the EU could be the next target. During this period of unpredictability, preference for a safe haven, the dollar, will only increase. Uncertainty over Trump’s policies may also force the US Federal Reserve to keep rates unchanged in the near term. This will only strengthen the dollar. On Monday, the dollar index — which measures the value of the greenback against euro, yen, pound, Swiss franc, Swedish krona and the Canadian dollar — rose to 109.84, up 1.24 per cent, even as on Tuesday, it was hovering around 108.5. In January, foreign investors withdrew more than $9 billion from Indian markets. In fact, February 3 was the 23rd consecutive day of FII outflows — the longest stretch at least in the past decade, as per a report by Axis Capital.

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Last year, the RBI had intervened heavily in currency markets to stem the rupee’s decline. Between September 27 and December 6, foreign exchange reserves fell by around $50 billion. While part of the decline could be on account of revaluation losses, this fall provides some indication of the extent of the central bank’s intervention. However, in recent weeks, the rupee has been allowed to adjust. With the pressure on the currency unlikely to abate, the RBI should allow the rupee to adjust, and intervene only to smoothen out excess volatility. There are concerns that a sharp depreciation of the currency will have an impact on inflation — as per some estimates, a 5 per cent depreciation could push up headline inflation by 35 basis points over some quarters. The central bank will have to be careful as it navigates an increasingly uncertain global and domestic environment. Considering the slowdown in the economic growth momentum, and with the government delivering on fiscal consolidation — budgeting to bring down its fiscal deficit from 4.8 per cent of GDP in 2024-25 to 4.4 per cent in 2025-26 — the RBI must move to ease policy rates.