Rupee at 60 : Reserve Bank of India Wants Stability, But is there a Right Level for INR..?

 By Mr. Arjun Parthasarathy, www.investorsareidiots.com

RBI (Reserve Bank of India) is waiting for the Indian Rupee (INR) to stabilize before it takes steps to help the economy grow from decade low growth rates of 5 % seen in fiscal 2012-13.

The INR is trading at levels of Rs. 61 to the USD and is threatening to go below all time lows of Rs. 61.21 seen in the beginning of July 2013.

RBI had taken steps to curb INR volatility at levels of about Rs. 60 by tightening liquidity and ensuring money market rates are in double digit levels.

 However, the rupee after a brief period of stability has again turned weak implying that market forces are strong on selling the INR.

Mr. Arjun Parthasarathy

The markets are worried on what the RBI will do if the rupee goes below all time lows. Will RBI take further monetary tightening measures?

If the central bank - RBI does take monetary tightening measures, India’s GDP (Gross Domestic Production) growth is likely to fall below 5 % levels for this fiscal year even as the RBI revised growth estimates from 5.7 % to 5.5 %.

RBI has always maintained that it does not have a target for the INR. Dr Raghuram Rajan, the government’s chief economic advisor too has gone on record saying that the government does not target any specific level for the INR

RBI has always maintained that it does not have a target for the INR. Dr Raghuram Rajan, the government’s chief economic advisor too has gone on record saying that the government does not target any specific level for the INR

Is the level of the  rupee at above Rs. 60 to the USD unpalatable to policy makers?

What is the significance of this level? Every level above Rs. 60 will be record lows for the INR but the same was true when the INR touched Rs. 60 as it broke all records when it started trending down from Rs. 57 levels.

Why did the RBI not initiate measures to prevent the INR from touching Rs. 60?

RBI wants stability in the INR?

At what levels? Rs. 60, Rs. 55 or even Rs. 65 (if it goes to that). RBI has always maintained that it does not have a target for the INR.

 Dr Raghuram Rajan, the central government’s chief economic advisor too has gone on record saying that the government does not target any specific level for the INR. If the central bank - RBI and the government do not have any specific level in mind for the INR, then why is the focus on the INR so sharp at levels of Rs. 60 and above?

The question is “Is there a Right Level for the INR?” Or for that matter “Is there a wrong level for the INR?” What should be the right level for the INR?

Is the REER (Real Effective Exchange Rate) the right measure for the INR? where the currency is measured against a trade weighted basket of other currencies (6 & 36) and adjusted for inflation.

The INR has been on a long term decline against the USD, falling from levels of Rs. 20 to current levels of Rs. 60 over the past 20 years. The economy in the meanwhile has had its ups and downs with growth rising to levels of 9.5 % from 4 % levels before falling to levels of 5 % in 2012-13.

The INR does not seem to have had an effect of pulling down long term growth prospects of the country even as it has shown a sustained fall against the USD.

On a REER basis, the currency has depreciated with index levels below 100 indicating that the weakness is broad based.

The central government and the RBI can not really prevent a trend decline in the INR but can only hold it for periods of time. The INR will go where it wants to go and policy makers have to get on with business rather than trying to the stem the INR fall.

Needless to say right policies will prevent decline and will bring about strength to the INR and vice versa.

 

Mr. Arjun Parthasarathy is the Editor of www.investorsareidiots.coma web site for investors.

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