Rupee fall disruptive, medium-term objective to direct action: Gokarn

Stating the sharp decline of Indian rupee against American dollar as 'disruptive', the Reserve Bank of India (RBI) Deputy Governor Subir Gokarn said any action to arrest the fall will be guided by medium-term considerations. The rupee plunged to nearly 33-month low level of Rs 52.73 against the US currency on sustained dollar demand amid weak trends in stock markets and deepening euro-debt crisis.

This historical decline is due to persistent demand for US dollar from banks and importers such as oil refiners to meet month-end requirements amid expectation of a further increase in dollar value overseas because of the ongoing debt crisis in euro-zone. 

'We don't really have a target or a rate in mind. It's moving as per market dynamics. It (fall in the value of the rupee) is disruptive, there is no question. There (will be) impact on our import bill, particularly for energy. It's having an impact on companies and it is a problem,' Gokarn said.

On market intervention by the RBI to control decline in rupee, Gokarn said, 'any action we take now (will) have to take into account the fact that these actions might have consequences a little further down the road. So we have got to balance out actions with risks or a potential increase in vulnerability later on.' By adding further he said, ‘actions have to be weighed in terms of their medium-term risks'.

The sharp decline in rupee is expected to push inflation rate, which is already hovering nearby two digit mark from several months. Gokarn said that ‘we should not be looking at only the short-term when we make these judgements. Every action that has been suggested... that has been debated also has potentially adverse consequences down the road. So we have got to balance out those too. ‘

Though the RBI has been maintaining that the exchange rate should be market determined, but the volatility in rupee has raised its concern. On this Gokarn said, ‘volatility is another thing. This is the sharpness and speed of the movement that is obviously creating some disruptions. We don't know where it is going to go, but it is something we need to watch out for.’

Earlier finance minister on the role of RBI controlling the volatility said that ‘the central bank would have been helpful if the fall was due to domestic factors. However, he expects that there will be a self correction in market.

The rupee had dropped past 52 a dollar, closing at a record low of 52.15, on strong dollar demand from importers amid worries that foreign investors may flee riskier assets and markets due to the global economic instability. The previous all-time closing low of the currency was 51.97 registered on March 3, 2009. The rupee is now among the top three worst performing currencies globally and has fallen by a whopping 15 per cent since July this year.  It is the worst performing currency in Asia, falling 14 per cent through the year.