Raghuram Rajan: Rupee Must Fall Down to Stay Competitive

February 18, 2016 Off By ridhi

Governor of Reserve Bank of India, Raghuram Rajan stated that it is important to cut down the inflation in order to keep exchange rate of the country competitive. It seems that RBI Governor is worried about “high inflation” of the country.

FC-Bank

While addressing an event by Federal Bank to honor 14th memorial of KP Hormis, Rajan said “If inflation still stays the same, we cannot become competitive. Hence, our objective should be bringing it down as certain amount of depression in Indian Rupee is important to ensure competitiveness.  However, the Governor added that RBI is not intended to lower the Rupee in a steady way. According to him, the RBI is focused on bringing inflation down so people will not be worried about the weak condition of rupee.

Rajan explained, “While looking at the actual exchange rate, rupee is flat. In simple words, we haven’t depreciated the rupee in real terms over any other global currencies. Over the past few years, we have been really very flat.”

“To conclude, you just don’t look at the dollar. Keep in mind that we live in a country which witnesses huge inflation. Otherwise, they have 1% interest rate or deflation that is very high in itself. We have up to 5 to 6 percent of inflation. CPI is estimated with 5.69% recently”.

Indian Rupee hit a whole new low of Rs. 68.30 over 29 months, which is near the lowest level it had grossed at Rs. 68.85 on August 28, 2013. Recently, we have witnessed at least 7 Paise of recovery.

The rupee pain led to a huge pullout from foreign investors from the nation since the start of the year.  When FPIs have dragged out whopping Rs. 83k Crores from Indian market, a lot of equities pulled around Rs. 23k Cr back over the first 11 days of the month.  After the increase of lending rates from the US Fed by 0.25% after 7 years of almost negative rates of interest after the global financial crisis in 2008, the fund outflow has been started.

In the international financial markets, the woes are driven with the problems in Chinese economy, which has witnessed around 6.7% of deceleration last year. It was lowest deceleration in 25 years. It has truly pulled the commodity and crude prices down by around 70%. Similarly, SENSEX dropped below 23000 on Thursday by crashing 807 points. It was the lowest the SENSEX fell in 21 months. The SENSEX has also lost around 12% and 23.5% this year from its highest in 30,028 points in the beginning of 2015.

When Dr. Rajan was giving answers during the interview, an engineering student asked a very interesting question. Here’s what she asked –

“When inflation goes up, Dosa prices rise. When inflation rates fall down, Dosa prices still remain the same. What’s wrong with our favorite Dosa?”

He said, when productivity is missing, workers should be used in different productive areas. In a growing economy, some sectors are growing and others are not witnessing their growth in technology. In the sectors which don’t improve their technology, prices for goods produced will go up tremendously.

He explained it further with an example that high wages of an individual who cooks dosa and using traditional “Tawa” and lack of upgrades are the reasons behind high cost.