Moneycontrol
Nov 28, 2011 08:21 AM IST | Source: CNBC-TV18

Rupee's rapid fall: How the RBI got it all wrong

On CBVC-TV18’s special show Indianomics, experts AV Rajwade, currency risk consultant and Dr Samiran Chakrabarty, head of research at Standard Chartered Bank in India analyze the Indian rupee; whether the push entirely justified by fundamentals and did the RBI get it all wrong and where do we go from here?


The big story of the week quite clearly is the rupee, as to fell to an all time low. With a 16% fall in 16 weeks, the currency of the second fastest growing economy in the world is now the worst performing currency in Asia


On CBVC-TV18's special show Indianomics, experts AV Rajwade, currency risk consultant and Dr Samiran Chakrabarty, head of research at Standard Chartered Bank in India analyze the Indian rupee; whether the push entirely justified by fundamentals and did the RBI get it all wrong and where do we go from here?


Both experts agree that the Reserve Bank should have intervened. However, there is a difference in degree. Rajwade believes the Reserve Bank should abandon its stance of market determined rupee and actively intervene to keep the rupee cheaper so the current account deficit doesn't get large.


Below is an edited transcript of the interview to CNBC-TV18. Also watch the accompanying video.


Q: What triggered the rupee fall? Was it only bad domestic fundamentals coinciding with worsening global mood or was it something else?


Rajwade: I do not ascribe the fall so much to what has happened in the global markets as to the internal weaknesses, in terms of the balance of payments. Since March 2009, after the crisis year, we seem to have changed the operational policy, in terms of the exchange rate quite significantly. Earlier while the official statements continued to be that we had no level in mind, we intervene only when there is volatility etc, there is enough empirical evidence to suggest that the RBI was trying to keep the rupee within a narrow range around the real effective exchange rate index in neutral value of that index through intervention, through sterilization and so on and so forth.


From March 2009, we seem to have put our faith in market determined exchange rate. I do not know whether this was the result of our being part of the G20 and wanting to be on the side of the Americans. In the debate on local imbalances and the need for China to move towards faster appreciation, whatever the reason there has been a change.


The result of course has been that there has been a very sharp widening of both the current account and trade deficits. Until roughly July they were being broadly financed through capital inflows. In fact capital inflows for much of this period were more than deficit on current account. Now the external factor comes in, probably only in the context that those capital flows both in the equity market and in the debt market.

The debt market refers to ECB

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