Why’s the rupee falling?

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The rupee debate has changed. Instead of despairing, as this newspaper has so frequently, why the rupee is not being allowed by RBI to appreciate, we have to now ask why the rupee has fallen so sharply so soon. Since the start of this fiscal year, the rupee has slid by as much as 7% against the dollar—even as the US currency has suffered bouts of lost confidence in international markets. The dollar rose from Rs 41 to Rs 42 within a span of just one week. True, the dollar has strengthened in recent weeks against many currencies. But the rupee has fallen much more sharply than others. The proximate reason is the surge in dollar purchases by oil companies to meet ever-rising bills brought on by soaring crude prices. Demand for rupees, simultaneously, has dipped because capital inflows are down (ECBs, thanks to over-regulation, are almost non-existent now and FII investments have been weak). There are also reports of hectic forward market activity accompanied by heavy spot buying of dollars—an indication of forex market expectations in the short term.

The bigger question is whether this is a momentary correction in an otherwise bullish environment for the rupee over the medium term, or signals a reversal that may be sustained for a while. The global picture points to a slow dollar decline, given the US economy’s imbalances, but the domestic effect of a large and widening current account deficit (other Asian exporters run surpluses) could outweigh that effect. What was pushing the rupee up in 2007-08 was heavy capital inflows, and while RBI took measures to slow them down, the direction of these flows is now seen to depend on domestic factors not marked by as much certainty as earlier. Since India has vast forex reserves, RBI is well armed against any possible crisis. But RBI’s role in all this remains unclear—we do not know how RBI behaves in the currency market day-to-day. Data on sale/purchase of dollars is published in monthly aggregates with a lag in RBI’s bulletins. Sebi, in contrast, posts daily information on net investment. Why can’t RBI publish daily data on forex intervention? Surely, there’s nothing to hide. And, there’s plenty to be gained from daily data. When the currency reacts sharply in a short period, we need to know what the central bank was doing.