Rajan Says Rupee Needs Some More Depreciation

Reserve Bank of India Governor Raghuram Rajan said there is a need for some depreciation of the rupee so that India doesn't become uncompetitive against other economies even as the RBI continues its fight to lower inflation.

"Until we bring inflation down - our objective to bring it down to lower levels - there will be a certain amount of depreciation (of the rupee) which is necessary to ensure that we don't become uncompetitive," Rajan said at an event organised by the Federal Bank to commemorate the 14th memorial of its founder K.P. Hormis on Saturday evening in Kochi.

The Governor, however, said the intent of the RBI is not to depreciate the rupee in a steady manner.

"Our focus is on bringing down inflation so that people will not have to ask why the rupee is weakening," Rajan said.

"If you look at the real effective exchange rate, it (rupee) is flat. In other words, we haven't really depreciated in real terms against the global currencies. We have been very very flat over the last couple of years. The bottomline is don't just look at the dollar," Rajan explained.

On Thursday the rupee had hit a fresh 29-month low of 68.30, which is close to the figure it had touched on August 28, 2013 at 68.85, though it recovered by 7 paise yesterday.

The pain on the rupee follows massive pullout by foreign investors from country since the beginning of the year. While FPI have pulled out over Rs 83,000 crore from the domestic market, mostly equities, they pulled back over Rs 23,000 core in the first 11 days of this month.

The fund outflow started after the US Fed increased its lending rates by 0.25 per cent after seven years of near negative interest rates that began following the 2008 global financial crisis.

The pain in the global financial markets is also driven by the troubles in the Chinese economy which has decelerated to 6.7 per cent last year, which is the lowest in 25 years. This has pulled down the crude and commodity prices by over 70 per cent.

Similarly, the benchmark Sensex crashed 807 points to drop below 23,000-mark on Thursday, its lowest level in 21 months, on concerns over global economy and mounting bad loans as also weak quarterly earnings of state-run banks.

So far this year, the Sensex lost over 12 per cent and over 23.5 per cent from its lifetime high of 30,028 points scored in mid-March 2015.