Hands-off policy cue

India may allow the rupee to fall and would only intervene to check any extreme volatility as the tumble of the Turkish lira roils emerging markets, finance ministry officials said.

By Our Special Correspondent
  • Published 15.08.18
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New Delhi: India may allow the rupee to fall and would only intervene to check any extreme volatility as the tumble of the Turkish lira roils emerging markets, finance ministry officials said.

Economic affairs secretary Subhash Garg told newspersons here on Tuesday the "rupee is depreciating due to external factors" but that there is "nothing at this stage to worry".

Officials said the consensus between the RBI and North Block was that there was no use worrying as the currencies of other emerging markets were falling as well and fighting such a global tide would simply prove too costly.

"The only case where the RBI would intervene through state-run banks would be in the case of extreme volatility," said officials.

The RBI has spent roughly $15 billion to support the rupee in the first quarter of this year, with interventions designed to check extreme volatility, said analysts.

The fall in the value of the rupee makes exports more competitive but also makes imports of crude oil, gold and electronics far more costlier and pushes up inflation in the domestic economy.

India imported some 220 million tonnes of crude last year for $87.7 billion at an average of Rs 65 to the dollar. A one rupee rise vis-à-vis the dollar translates into a Rs 880 crore increase in the oil import bill. This would obviously push up the inflation rate - already the July inflation figures at 4.17 per cent are nearly 76 per cent more than the 2.36 per cent inflation reported in July last year.

"We will have to live with imported inflation as all dollar denominated imports will cost more in the country as the rupee may continue to fall for sometime before the global currency contagion plays out," said officials.

Economists expect the rupee to weaken to 72 a dollar before making a recovery to about Rs 69.

"However we do not expect any run on the rupee ... it's a contagion effect which is impacting all emerging economies, quite similar to what happened when the Italian economy had taken a hit," said the officials.