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Global financial cold gives India the sniffles

The Reserve Bank of India is selling dollars to cushion the rupee. But not much can prevent currency weakness for now.

india Updated: Sep 19, 2008 21:41 IST

The global financial meltdown has sent stock indices into a tailspin with the rupee hitting dizzying lows in India. The rupee plummeted to Rs 46.93 to the US dollar on Tuesday before getting back on its feet and even strengthening on Friday, thanks to the Reserve Bank of India’s (RBI) intervention. There’s not much good news on the currency front that will hover around Rs 45 to Rs 47 to a dollar. This brings us to the question, is a weak rupee good or bad for our economy? Exporters will open the bubbly as a weaker rupee makes their products cheaper in the world market. But if you happen to think of going to study abroad, you are likely to see an increase in your expenses in rupee terms. Indian travellers, too, will have to exchange more rupees to buy dollars when they go abroad.

Policymakers, preoccupied as they are with taming domestic inflation, don’t see much merit in the cheaper rupee since it makes the country’s imports relatively costlier. The big question, then, is how long will policymakers allow the rupee to continue on a downward spiral during the coming months. The RBI is wary of any suggestions that it targets any particular exchange rate of the rupee.

But it keeps a sharp eye on it all the same to prevent excess volatility. Checking inflation apart, the RBI is not too happy over the prospect of capital flows into the economy declining. Foreign institutional investors (FIIs) have begun to head for the door and have pulled out $9 billion from the domestic stock market so far this year.

But the central bank, flush with foreign reserves, has been selling dollars to augment supplies in the market. This is precisely what has provided a cushion for the rupee since Tuesday. Besides the FIIs pulling out, there is dollar demand also from the State-owned oil importers. So long as the global financial turmoil persists, the central bank will keep offloading greenbacks. Its foreign exchange reserves kitty is already slimmer as a result. Whether this gathering trend marks a sudden reversal of the phenomenon of rising foreign exchange reserves bears watching. But one thing is for sure. There’s not much that can prevent weakness in the currency unit in the period ahead.

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