For some it will be the best of times, for others the worse. The Indian rupee has reached unprecedented lows against the dollar as investment into the country slows due to the strengthening of the US economy and concerns about India’s economic and fiscal policies.
In a move that provided a boost to the rupee, the government has appointed Raghuram Rajan, a former chief economist at the International Monetary Fund (IMF), to head the Reserve Bank of India from September.
The appointment of an outside technocrat, especially one who has indicated that he is aware of the limits of the influence of central banks, will strengthen investor confidence. While there will be many calls for action, the fall of the rupee is the result of international market trades and any intervention by the reserve bank is likely to have very little effect and be prohibitively expensive. As many other countries have learnt, often the best course of action is simply to ride out currency volatility.
India now faces the danger of inflation from higher prices on vital imports. At the same time, its exports will become more competitive on international markets, which could bring in much needed foreign earnings.
Those Indians working outside the country will also see the value of their foreign savings increase. If they choose to repatriate their funds now, this will also help strengthen the rupee.
