After maintaining silence for the whole of this week on rupee’s steady fall, finance minister P Chidambaram called for calm as the Indian currency breached the 65-mark against the US dollar.
“We believe that rupee is undervalued and has overshot what is generally believed to be a reasonable and appropriate level,” he said in Delhi, hours after the rupee plunged to a record low of 65.56 against the dollar.
The currency surpassed its previous record low of 64.54 touched on Wednesday, the day the Deutsche Bank said in a research note the rupee could touch 70 level in a month’s time.
Chidambaram stressed there was no need for excessive or unwarranted pessimism. “There is no cause for panic that seems to have gripped the currency market and that is feeding into other markets. We are confident that stability will return to these markets and we can get on with the task of promoting investment and growth.”
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the Reserve Bank of India (RBI) will hesitate to cut interest rates, a step needed to boost economic growth. So consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recedes because the economy is struggling.
The rupee has now fallen by 5.5% in five days.
Chidambaram, who earlier in the day held a three-hour long discussion with RBI governor D Subbarao and his successor Raghuram Rajan, said recent steps taken by the Reserve Bank to reduce volatility in forex market and quell speculation would be revisited.
In a separate media briefing, Subbarao said India had adequate forex reserves and the RBI would take appropriate measures to curb rupee volatility.