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Indian Rupee takes a knock

May 10, 2000

The Indian Rupee slipped to an all time low of Rs 44.05 per US Dollar today. Among the reasons being cited are worries regarding a drought, increasing defence imports and a slowdown in foreign investment. The depreciation in the value of the Rupee has so far failed to elicit a response from the Reserve Bank of India. Read interview with Dr Y V Reddy, Dy. Governor, Reserve Bank of India

A lower value of the Indian Rupee should not disturb the government. Short-term debt is at negligible levels and the current account deficit is approximately at 1% of GDP. A lower value of the Rupee would only make Indian exports (of goods and services) more competitive. There would however be inflation in the cost of imports and debt servicing costs. This, given the large forex reserves, should not be difficult to take care of.

The industry (excluding exporters of course) may however be worried. Depreciation in the value of the Rupee implies higher cost of capital goods higher project costs. It also means higher debt servicing costs for companies that have not adequately hedged their exchange rate exposure.

The situation could turn grim if there was actually a pull out of funds from India. This is unlikely due to the fact that convertibility on the capital account is restricted. Therefore, more than anything else, the RBI's silence seems reflective of the fact that it concurs with the depreciation in the value of the Rupee. Probably, lower growth in exports is an area of concern.

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