RBI Faces Divergent Views on Rupee Management

Indian Rupee Hits Record Low: Experts Recommend Calibrated Response

The Indian rupee has fallen to a record low of Rs 96.95 against the US dollar, prompting economists to urge the Reserve Bank of India (RBI) to adopt a calibrated response to arrest the depreciation of the currency. Chairman of the Sixteenth Finance Commission, Arvind Panagariya, has suggested that the RBI should allow the rupee to depreciate if necessary and not treat the Rs 100-per-dollar mark as a trigger for policy intervention.

Economists say that a similar response to the one taken in 2013 may be needed to arrest the depreciation of the rupee. In 2013, the RBI implemented measures such as a swap window to sharply raise deposits in dollars from non-resident Indians (NRIs) and providing a window for oil marketing companies to borrow dollars directly from the RBI. These measures may be considered again, but in a "measured way" to ensure the depreciation happens in a gradual manner.

The Indian rupee has fallen around 7 percent year-to-date against the US dollar, and analysts expect it to depreciate further, possibly crossing Rs 97.5-a-dollar mark in the coming months. For perspective, the currencies of Indonesia and Philippines have depreciated by 4 to 5.5 percent year-to-date.

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Comparison of Currency Depreciation

The RBI's measures in 2013 were successful in pulling in about $26 billion in fresh capital inflows within a few months. If a similar measure is implemented, the banks may fetch more capital inflows this time, which will help to curb the rupee's decline, said Vivek Kumar, economist at QuantEco Research.

The RBI had also opened a direct dollar swap window for oil marketing companies (OMCs), which allowed them to buy dollars directly from the RBI's reserves rather than bidding in the spot market. Moreover, the RBI had hiked the Marginal Standing Facility (MSF) rate by 200 basis points (from 8.25% to 10.25%), effectively to push up the cost of short-term borrowing for banks.

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However, some economists argue that letting the rupee depreciate unchecked risks reinforcing the depreciation spiral. Dhiraj Nim, economist and FX strategist at ANZ Bank, said that there's a need for policy reset by the RBI, as it can "no longer rely on tactical measures and FX intervention alone." Excessive depreciation in the rupee can amplify the imported inflation shock and make the impact remain in the system for a long period of time, said Sakshi Gupta, principal economist at HDFC Bank.