Is the rupee’s fall is a major worry?

With the strengthening of the US economy and rising oil prices, the rupee has suffered a sustained fall this year, sliding from levels of 63 against the dollar in January to over 74 in October.But is the rupee’s fall is a major worry?

Not particularly. Every currency moves; the exchange rate will move both in the long term and in the short term, because there are differences in productivity, inflation rates, etc. Thirty or forty years ago, the rupee was 25-30 [against the dollar], but it would not stay there. In the long term, the reasons are productivity differences; in the short term, it is demand and supply and inflation differences, and in the even more short term, expectations, and just what happens in financial markets across the world. So,it is very normal for a currency to move.

In fact,it was worrisome when the rupee was not moving. For a whole year or so, the real effective exchange rate was actually appreciating. Our inflation rates were higher than the inflation rates of our competitors and trading partners, and because the nominal exchange rate was not moving, it meant that in real terms we were losing competitiveness. Our exports were more expensive than our competitors’, our imports were cheaper, so it would be cheaper to import things than to buy domestically produced things.

The rupee was due for a correction, and yes, when there is a correction, there might often be overshooting, because expectations often determine the correction. So,the fall of the rupee is not a major worry.