Raghuram Rajan says rupee needs modest weakening after it falls to all-time low; elections, dollar to blame

Former RBI governor, while speaking to a news channel, said since the rupee had been strengthening for quite some time and inflation, despite being modest, remained above world rates, the domestic currency needed a modest weakening.

Former Reserve Bank of India (RBI) governor Raghuram Rajan said the fall of rupee has more to do with strengthening of the US dollar. Image source: Reuters

Even as Indian rupee's downward slide continues after its fresh all-time low of 70.32 against the US dollar in opening trade today, former Reserve Bank of India (RBI) governor Raghuram Rajan said the fall of rupee has more to do with strengthening of the US dollar.

Former RBI governor, while speaking to news channel CNBC-TV18, said since the rupee had been strengthening for quite some time and inflation, despite being modest, remained above world rates, the domestic currency needed a modest weakening.

Rajan said that some effect on the local currency could also be due to the upcoming elections.

India’s first statistician Pronab Sen reportedly said that falling rupee is not much of a concern, and added that what may be a cause of concern is the knee-jerk reaction to the fall. Further, he said that the current currency situation is not a bad place to be in, but the real worry would be when things start going the other way and the rupee appreciates further.

Other experts too have reportedly stated that rupee is over-valued by 5-7%, and will correct itself by depreciating further.

Continuing its free fall, the rupee today slumped 43 paise against the dollar to trade at a life-time low of 70.32 on strong demand for the US currency. Earlier on Tuesday, it finally breached the 70 mark for the first time in India’s history, mainly due to sell-off in emerging currencies following free fall in Turkish Lira.

Niti Aayog vice chairman Rajiv Kumar, however, said today that the falling rupee is not a cause of worry as it is getting back to its natural value.

Talking to media persons on the sidelines of an event organised by Nabard in New Delhi, he said, "The rupee rose by about 17 per cent during the last three years. Since the beginning of this year, rupee has declined by only 9.8 per cent. So, it has recovered. It is rather coming back to its natural value."
Rupee should be realistically valued and should not be overvalued, he said, adding that the exchange rate is a price which should reflect true equilibrium between demand and supply.

Meanwhile, high trade deficit and current account deficit continue to be a concern for India. India’s trade deficit touched a five-year-high at $18 billion on swelled oil import bill and jump in gold purchases in July.

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India’s trade deficit puts pressure on current account deficit (CAD), which could worsen to around 2.7% of GDP this fiscal, against 1.9% a year earlier, ICRA said.

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