Following the 11.4 per cent decline in the dollar value of the rupee over barely a quarter, the sharp slump of last week has further complicated an already tricky situation for the Reserve Bank of India (RBI).
Not surprisingly, RBI Deputy Governor Subir Gokarn has expressed "concern" about the sharp depreciation within "such a short period of time". It is hard to predict what the ramifications will be, given that the depreciation has varying implications for different economic actors.
While RBI has been slow to intervene in the foreign exchange market, and it had reasons for being slow, it may have no option but to act with greater alacrity in days to come.
The depreciation in the dollar value of the rupee is evidently owing to foreign capital seeking a safe haven in the US dollar, in response to the volatility currently roiling global financial markets, especially the euro area.
The immediate concern is whether delayed intervention by RBI would lead to a surge in "imported" inflation. If so, how would RBI respond? Raising interest rates has not proved effective so far and another round of interest rate hike will dampen business sentiment further.
Since RBI has the required foreign exchange reserves, should it intervene more forcefully to pull the rupee up a bit?
The jury is out on that question. On a positive note, it is likely that capital flows would reverse direction once volatility settles resulting in investors returning to emerging markets such as India, to leverage interest rate differentials between developed and emerging markets, in a replay of what happened two years ago.
The rupee's depreciation is, ceteris paribus, likely to benefit domestic exports, currently enjoying an unprecedented boom.
It could potentially provide a shot in the arm to the software
id="div_arti_inline_advt">
sector, which is currently languishing owing to deflated demand in the West.