The Indian Rupee is in a fragile mode with forex markets witnessing the Indian Rupee trading to all-time lows of 88.47 in trading session on Thursday. In the session, the Rupee plunged 36 paise. That thanks to demand for the greenback and other global factors.
A weaker Rupee may not seem motivating to a domestic audience keen on buying imported goods during a festive season. That, considering electronics such as Cameras, Smartphones, and even Gold are largely imported. This week, Indians were greeted with news of Gold rates surpassing 1.10 lakhs per tola or 10-grams. A weaker Rupee would also mean that Crude oil, crucial to everything from cooking to travelling to hailing an Uber or ordering delicacies on Zomato would become expensive. Of course, a weaker Rupee certainly means costlier petrol at the pump.
So, how much will the Rupee contract more? Is it going South? There are no clear answers. But last week, a Bloomberg report quoted export lobby group guestimating the probability of the Rupee at 103 against the US Dollar. The article quoted chiefs of EPCs - majorly the Engineering Export Promotion Council.
INDIA'S MANEUVERS
While a weaker Rupee makes exports to destinations such as America and Europe lucrative to exporters; such a predicament could dent domestic-consumer sentiments and even stoke inflationary concerns for the central bank. So far, Indian policymakers and the Central Bank have attempted to prevent that very predicament.
Besides reforms on GST, India has cautiously attempted to maneuver America's surprising googly of tariffs. And that with a straight bat. Besides GST, India carried herself graciously by participating at the SCO summit in China; expressing her allegiance with BRICS; and also amplifying conversations around trade and treaties with neighboring countries. On Thursday, Prime Minister Narendra Modi hosted his Mauritius counterpart - the highlight of this conversation as per a PTI report was "the two countries enabling bilateral trade in local currencies".
Yesterday, Commerce Minister Piyush Goyal was quoted as saying that trade talks were progressing with US, EU, New Zealand and Oman. His comments appeared on the very same day the Chief Economic Adviser was quoted saying that India was on a sustainable growth chart despite the tariffs (he indicated that GST reforms were likely to cushion tariffs).
More importantly, Dr V Anantha Nageswaran highlighted that India was not considering the likelihood of replacing the US Dollar as a reserve currency. There have been speculations about Indian Rupee emerging as a new Reserve Currency and how such a development could protect India from unreasonable 50% tariffs.
However, such naive speculations or assumptions remain contrary to the pioneering work of Belgian American Economist Robert Triffin who showed the predicament of being a reserve currency.
HARD WORK AHEAD FOR RESERVE BANK
The Reserve Bank, the administrator of the currency has rallied to control the Rupee from sinking lower. At the start of this month, the central banker was reported as having arrested the Rupee's fall by selling off precious forex. Back then, the Rupee slid as FPIs exited in hordes - about $2.4 billion in equities in three sessions.
While the market-performance in the last seven-days has been positive, any additional contractions are likely to test the RBI's own limitations. Most economists and central bankers refer to this limitation as a trilemma. Any central banker could achieve only two of the three key common objectives - capital movement, fixed exchange rate, and independence of the monetary policy.
Therefore, as India gears up for festive mode, the RBI and streets both are likely to wish for either ease in tariffs or for the Rupee to stay where it is currently. Perhaps, that could help the RBI Governor Sanjay Malhotra from the predicament of facing the trilemma.
