The Indian rupee's decline to a historic low of 86.59 against the US dollar on Monday has stirred concerns, but former Reserve Bank of India (RBI) Governor Raghuram Rajan has provided a measured perspective, attributing the depreciation primarily to the strengthening of the US dollar rather than domestic economic factors.
"The fixation, of course, always is with the rupee-dollar exchange rate," Rajan said in an interview with Mojo. "The reality is the dollar has been strengthening against many currencies. If you look at the Euro, the dollar could buy 91 cents at the beginning of last year, and now it buys 98 cents. That's about a six to seven percent depreciation in the Euro."
Rajan emphasised that the rupee’s fall, from around 83 to 86, is relatively moderate in comparison. He framed the current situation as "really a dollar issue," driven by several factors, including market expectations of reduced US trade deficits under the new administration and safe-haven buying of dollar assets.
"It's really a dollar issue. The dollar is strengthening partly because of the thought that the new administration with applied tariffs the deficit may go down. The trade deficit for the US...that will strengthen the dollar. There's also some potential safe-haven buying at this point into dollar assets. So given all that, I wouldn't be overly worried."
The noted economist further said that if one looks at the real effective exchange rate of the rupee - that is its exchange rate against all countries and correcting for inflation - "it's actually not depreciated that much" and "maybe some additional sort of nominal depreciation might be useful for Indian exports."
The rupee's steep fall on Monday, due to the strengthening dollar and surging crude oil prices, was followed by a recovery of 21 paise on Tuesday, as crude prices eased and the dollar retreated slightly. The fluctuations come against the backdrop of India's declining foreign exchange reserves, which stood at $634.59 billion for the week ending January 3, down from an all-time high of $704.885 billion in September.
When asked whether RBI needed to intervene, Rajan answered in negative. "You don’t want to intervene ever against adjustments that are taking place because of fundamental economics. What you want to intervene against is volatility, which is short-term. It is going to go away. My sense is dollar appreciation is something that will play out for some time until we see the new administration's policies. So in that sense, I'm not overly worried with what is happening."
The former RBI Governor also pointed out the potential benefits of a nominal depreciation of the rupee for Indian exports. "If there are tariffs being raised all over the place, the natural way to combat that is through some depreciation of your currency to offset the tariffs applied to your exports."
Asked whether this decline was due to FII pulling out dollars, Rajan said that India should be a little careful when these (FII) flows come in and they go out. These inflows have been coming in for quite some time in the past and some of that was going out of China and readjusting by finding other emerging markets to go into, he said.
"And India looked reasonably strong in terms of growth and stable politically. Therefore flows came seeking assets in India. (But now) Chinese assets have become a little more attractive as the Chinese government is talking about stimulus. That hasn't played out fully as we haven't seen stimulus to the extent that people anticipated perhaps because the Chinese are waiting for the US administration to make its moves. But that has led to some rebalancing in global portfolios towards more holding a little more China."
"So my sense is these are all natural adjustments. There's nothing in the immediate to panic about," Rajan said.