Rupee needs to fall further, says Raghuram Rajan

RBI governor Raghuram Rajan has said there is a need for some more depreciation of the rupee so that India doesn’t become uncompetitive against other economies even as the Reserve Bank continues its fight to lower inflation.

“Until we bring inflation down — our objective to bring it down to lower levels — there will be a certain amount of depreciation (of the rupee) which is necessary to ensure that we don’t become uncompetitive,” Dr Rajan said at an event organised by the Federal Bank to comme-morate the 14th memorial of its founder K.P. Hormis on Saturday.

The governor, however, said that the intent of the RBI is not to depreciate the rupee in a steady manner.

“Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening,” he said.

“If you look at the real effective exchange rate, it (rupee) is flat. In other words, we haven’t really depreciated in real terms against the global currencies. We have been very very flat over the last couple of years. The bottomline is don’t just look at the dollar,” Dr Rajan explained.

On Thursday, the rupee had hit a fresh 29-month low of 68.30, which is close to the figure it had touched on August 28, 2013 at 68.85, though it recovered by seven paise yesterday.

The pain on the rupee follows massive pullout by foreign investors from country since the beginning of the year. While FPI have pulled out over Rs 83,000 crore from the domestic market, mostly equities, they pulled back over Rs 23,000 core in the first 11 days of this month. The fund outflow started after the US Fed increased its lending rates by 0.25 per cent after seven years of near negative interest rates that began following the 2008 global financial crisis.