Raghuram Rajan Offers Insights on Rupee's Depreciation: A Dollar-Driven Phenomenon

The Indian rupee recently touched a historic low of 86.59 against the US dollar, raising widespread concerns. However, former Reserve Bank of India (RBI) Governor Raghuram Rajan has downplayed fears, attributing the decline to the strengthening of the US dollar rather than domestic economic weaknesses.

Depreciating Rupee: Unveiling the Global and Domestic Forces Behind the Decline

Rajan's Perspective: In an interview with Mojo, Rajan highlighted that the rupee's fall, from 83 to 86, is relatively modest compared to other currencies like the Euro, which has seen a 6–7% depreciation against the dollar over the past year.

"It's really a dollar issue," Rajan explained, noting factors such as market expectations of reduced US trade deficits and safe-haven buying of dollar assets. He emphasized that the rupee’s real effective exchange rate, which accounts for inflation and exchange rates with multiple currencies, remains largely stable.

RBI Intervention Unnecessary: Rajan dismissed the need for RBI intervention, suggesting it’s important to let the market adjust to fundamental economic shifts. "Intervention should only be used to curb short-term volatility," he said, adding that the current dollar strength is likely to persist until the new US administration’s policies become clearer.

Impact on Exports and Global Dynamics: Rajan pointed out that a nominal depreciation of the rupee could potentially benefit Indian exports, helping offset the impact of global tariffs. He also touched upon shifting Foreign Institutional Investor (FII) flows, noting that recent pullbacks were influenced by renewed interest in Chinese assets, driven by the Chinese government’s stimulus signals.

Recovery and Reserves: The rupee's recovery of 21 paise on Tuesday, aided by easing crude prices and a slight dollar retreat, followed Monday's sharp decline. Meanwhile, India’s foreign exchange reserves stood at $634.59 billion as of January 3, significantly down from September’s all-time high of $704.885 billion.

Rajan's measured insights underscore that the rupee’s depreciation is part of a broader global trend driven by dollar dynamics, rather than a reflection of India’s economic fundamentals.