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Mint Quick Edit | The rupee’s sharp Friday drop: Where is the exchange rate headed? - News

Mint Quick Edit | The rupee’s sharp Friday drop: Where is the exchange rate headed?

1 month ago 3

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A trade pact with the US should increase rupee demand for trade and investment, but if we can’t clinch one, a weakening currency may serve India well. (Bloomberg News)

Summary

The rupee slid past 89 to the dollar last week. This can be traced to a confluence of factors, including a hands-off RBI. A trade deal with the US may turn its path around, but without one, the case for a weaker currency strengthens.

The Indian rupee on Friday slumped to a record low of about 89.60 to the US dollar, zipping past the 89 mark for the first time. Its difficulties came amid a sharp fall in global tech share prices as risk-off sentiment rose, even as a US-India trade deal continued to elude us.

Just the day before, Reserve Bank of India (RBI) Governor Sanjay Malhotra had reaffirmed RBI’s stance on letting the currency float, with its interventions aimed only at smoother exchange-rate movements.

Since this was a long-held position, it should not have been a factor, though market participants might have taken the 89 level cracking as a sign of an even more hands-off RBI and dollar purchases to cover short positions may have exacerbated the rupee’s slide.

The sense that we need a weaker rupee as an export booster has been gaining traction. While India’s external balances have been in good shape, trade headwinds lend that argument weight. In a world where capital flows shape exchange rates more than trade gaps, we can’t escape volatility.

A trade pact with the US should increase rupee demand for trade and investment, but if we can’t clinch one, a weakening currency may serve India well.

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