The rupee hit a record low of 72.11 last week marking a sharp fall over the last few days, starting with the slide in mid-August, as emerging markets face pressure with the US dollar strengthening and rising crude oil prices. All these have prompted commentators to draw a parallel between 2013 when the Indian currency came under attack, prompting the UPA government to counter it with policy measures, and the current scenario, though the losses were stemmed on Friday with the RBI intervening and the rupee closing at below 72. The big difference in 2013 was that the economy then was on a slippery path — with a slowdown in growth and a twin deficit — both on the current and capital account, forcing the then government to resort to extreme fiscal and monetary tightening. At that time when there was a flight of capital, India was one of the worst performing economies among the emerging market pack and was targeted by investors. In short, it reflected the fundamental weaknesses of the economy then.
Today such comparisons would be flawed. For, India cannot be bracketed with Turkey, Argentina, Brazil or the other emerging market peers, some of whom are also running current account deficits. Yes, the deficits have widened but clearly, unlike some of its peers, there is a recovery underway which is reflected in the latest data which shows that the Indian economy expanded 8.2 per cent in the April-June quarter this fiscal. When that is the case, the policy response has to be a measured one and not knee jerk. There have been some calls to counter the slide by raising interest rates — like Argentina or Indonesia have done. But despite such advice, the Indian central bank should carefully weigh whether it should bump up interest rates aggressively, especially out of the cycle hikes, considering that such a policy action is bound to derail growth.
Instead of panicking, policymakers should settle for some measure of depreciation with the occasional intervention by the RBI so that it does not become a one-way bet on the currency. What is more important now is maintaining fiscal discipline — or reining in excess spending. Such a policy response should pay off when the current rout of emerging markets ends and when India could be an outlier in terms of its better economic management and growth prospects. So far, the RBI and the government have been sensible in their approach — with the government allowing diesel prices to be passed on. Patience is key.