The rupee plunged to 52.50 against the greenback as foreign exchange markets opened, causing further problems for the Indian central bank as it tries to rein in near double-digit inflation. The weakening rupee is expected to fuel domestic inflation because oil imports priced in dollars will become more expensive, translating into higher prices for local consumers and businesses.
“It (the weakening rupee) is disruptive, there is no question,” the deputy governor of the Reserve Bank of India (RBI), Subir Gokarn, told reporters in the financial capital, Mumbai. “There will be an impact on our import bill, particular for energy. It’s having an impact on companies and it is a problem.”
Gokarn, forex dealers and analysts said however that the fall matched market trends, as investors flee riskier emerging market and eurozone assets, pushing up demand for the dollar, which is seen as a safe haven in times of crisis. Dealers added that the rupee’s fall had been exacerbated by the finance ministry’s comments on Monday that the Reserve Bank of India had only a “limited” ability to arrest the partially convertible currency’s slide. Media reports and analysts said the RBI had intervened for the first time in more than two months to try to quell the decline of the rupee, which has tumbled by about four per cent against the dollar in the past six trading days.
“There’s no official confirmation but people think that’s the case,” said economist Siddartha Sanyal, from Barclays Capital. “At this moment, the dynamics seem to be pretty much against all emerging market currencies and that’s not really helping the rupee,” he said. The RBI’s Gokarn said the bank had no target level for the currency, although he admitted the weakening rupee could have an immediate impact on inflation.