Mint Quick Edit | Has the rupee weakened or strengthened?
Summary
- It has fallen against the dollar but its real effective exchange rate, vis-a-vis a basket of currencies, is at a peak. Is this too risky? That’s a call for RBI to take.
On the face of it, the Indian rupee seems to be weakening, having fallen to a low of around 85.26 to the dollar. But there is more to it than meets the eye.
The rupee’s real effective exchange rate, which measures its value relative to a basket of trade-relevant currencies, is at a peak.
This means that while the rupee has softened in relation to the dollar, it has hardened vis-a-vis other currencies.
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Indian exporters, who see their wares get more competitive when the rupee weakens, have no reason to rejoice.
A part of the rupee’s relative strength may be attributed to market intervention by the Reserve Bank of India (RBI).
Though it doesn’t disclose such actions very frequently, India’s dropping foreign exchange reserves suggest heavy dollar sales by RBI in support of the rupee.
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Perhaps the central bank is wary of imported inflation.
That said, apart from the impact on exports, some commentators argue an over-priced currency exposes the rupee to the risk of an attack by speculative traders, as seen in the Asian Crisis of 1997.
Since we still have some capital controls in place, this comparison is inaccurate.
But it’s true that a sharp slide in the rupee’s value against the dollar may be needed at some point.
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