Rising Dollar Led To Rupee Depreciation, Not Domestic Factors Says Former RBI Governor Raghuram Rajan

The Indian rupee fell to a record low on Monday, January 13, the currency fell to an intraday low of Rs. 86.58 against the US dollar and closed at Rs. 86.5. The rupee depreciated as the US dollar strengthened after the dollar index, which measures the US Dollar against other major currencies, rose by 0.43 per cent on Friday, January 10.

Former Reserve Bank of India (RBI) Governor Raghuram Rajan claimed that the depreciation of the rupee happened due to the strengthening of the US dollar rather than domestic economic factors in an interview with media platform Mojo Story. Rajan added that other currencies such as the Euro have also witnessed a 6-7 per cent depreciation.

"The fixation, of course, always is with the rupee-dollar exchange rate. The reality is the dollar has been strengthening against many currencies. If you look at the Euro, the dollar could buy 91 cents at the beginning of last year, and now it buys 98 cents. That's about a six to seven per cent depreciation in the Euro," Rajan told Mojo Story.

Rajan said that given the decline other currencies have witnessed, the rupee’s fall from Rs. 83 to Rs. 86 is relatively moderate. Rajan added that it is "really a dollar issue". Rajan attributed the strengthening of the dollar to market expectations of reduced US trade deficits under the newly elected Donald Trump administration and safe-haven buying of dollar assets.

"It's really a dollar issue. The dollar is strengthening partly because of the thought that the new administration with applied tariffs the deficit may go down. The trade deficit for the US... will strengthen the dollar. There's also some potential safe-haven buying at this point into dollar assets. So given all that, I wouldn't be overly worried," Rajan said.

Rajan also said that the Reserve Bank of India should not intervene in adjustments which are taking place due to fundamental economics. However, he added that interventions should be made to counter volatility. Rajan projected that dollar appreciation is likely to continue till new policy decisions are announced by the Trump government.

"You don’t want to intervene ever against adjustments that are taking place because of fundamental economics. What you want to intervene against is volatility, which is short-term. It is going to go away. My sense is dollar appreciation is something that will play out for some time until we see the new administration's policies. So in that sense, I'm not overly worried about what is happening," Rajan noted.

The former RBI Governor mentioned that the depreciation of the rupee can also potentially benefit Indian exports by offsetting trade tariffs.

"If there are tariffs being raised all over the place, the natural way to combat that is through some depreciation of your currency to offset the tariffs applied to your exports," Rajan said.

Rajan concluded that the depreciation of the rupee against the dollar is a natural adjustment and nothing to panic about.

"So my sense is these are all natural adjustments. There's nothing in the immediate to panic about," Rajan said.