Decline of rupee: Should the fall be welcomed?
The rupee has seen a sudden decline, after months of stability, dragging the scenario back to mid-2013 levels when the currency (and economy) was in dire straits. Although situation presently is nowhere near as dismal in comparison to those days, pressure certainly is mounting.
While India is very much strong on the external frontier at present, certain other factors are creating stress on the currency. Oil prices are strengthening back after months of calm, MAT issue has dented confidence of foreign investors, money is getting pulled out of bond and equity markets by FII’s and surely poor corporate earnings in the last quarter. As US Fed prepares to increase policy rates, fears will only swell further resulting in out-flow of funds from emerging economies.
Volatility is on a rise in the bourses and considering the changing trends of trade every day, investors fear to invest.
Also the chart shows, the real effective exchange rate, (REER) which is the weighted average of a country’s currency relative to a basket of currencies of its trading partners adjusted for inflation, has been hiking up, even as the rupee has been declining relative to the US dollar in the past one year. That shows the rupee is overvalued. Hence, the fall may, in fact, be welcomed.
But, only time will tell what happens in the coming days.