The Indian rupee closed at a new record low of 58.15 to a dollar on Monday - a drop of 110 paise over the previous close - and looked on course to the breach the 60 to dollar mark amid strong signs of recovery in the United States (US) that is prompting global investors to withdraw money from emerging economies.
A weaker rupee, which has fallen by over 5% since May, will make studying or travelling overseas costlier by making buy dollars expensive. It will also push up the prices of all imported goods such a crude oil and gadgets.
Costlier crude oil and the resultant increase in fuel prices can fan inflation by knocking up the prices of most goods.
For finance minister P Chidambaram and RBI governor D Subbarao, a persistently weak rupee adds to an array of problems, graver than just mounting travel and college expenses. An imploding Europe, India’s biggest export market, could negate much of the exporters’ gains from a weak rupee as orders dry out.
A weak rupee is also a warning sign of dipping investor sentiment in a slowing economy that is struggling to rein in a widening current account deficit—or the difference between dollar inflows and outflows.
The government, however, exuded confidence that the rupee will stabilise soon.
“If you see weakening of all currencies vis-a-vis dollar, rupee is also not unaffected in that sense. But I think this is panic (in) the market which is unwarranted,” economic affairs secretary Arvind Mayaram told reporters on sidelines of a workshop in Mumbai.
“They have now more than clarified that this (Quantitative Easing withdrawal) is not imminent neither it is going to be something which will happen quickly.
I think this will settle down in a while. We should not worry but we are watching the situation closely,” he said.
The central bank of US, The Federal Reserve, is likely to start winding down the third round of quantitative easing (QE3), which involved a purchase of bonds by the Fed to pump in money ($40 billion or about Rs 2.24 lakh crore each month) into the financial system to help the American economy claw out of its worst slowdown in 80 years.
Last Friday's better-than-expected US jobs data appears to support the view that the US, which represents about a quarter of the world’s economy, is showing early signs of turnaround.