Rupee’s fall due to strong dollar, India should watch rupee-yuan rate: NITI Aayog member

NITI Aayog member Arvind Virmani has said the recent depreciation of the rupee is due to the strengthening of US dollar and opined that in this period of global uncertainty, India should also look at the rupee-yuan rate.

Virmani said the RBI's stated policy is that it does not target a specific exchange rate but intervenes in the market to check 'excess' volatility.

"When we talk about the rupee-dollar rate, there are two elements to it – one is the appreciation of the US dollar... and much of what you see... is now due to the US (dollar) appreciation.

"So that is really not under our control, and not something our policymakers have to worry about," he said in an interview with PTI.

The rupee has been falling in recent weeks, and on Feb 3 touched an all-time intraday low of 87.29 against the American currency.

The other element, Virmani said, is the depreciation with respect to the index, and one way to measure that is to compare it to other countries because the general appreciation of the rupee affects everybody.

"As somebody suggested recently, we should look more closely at the rupee-yuan rate, that's a good suggestion.

"Of course, we have to look broadly at our competitors, also in this period of uncertainty," the NITI Aayog member noted.

The Indian rupee has been under pressure in the last few months but it continues to be the least volatile currency against the US dollar among its Asian and global peers.

The reasons for the rupee hitting record lows almost on a daily basis against the US dollar range from a widening trade deficit to a surge in the dollar index after the US Federal Reserve hinted at fewer rate cuts in 2025.

Asked since the finance minister has maintained fiscal discipline, and is aiming to lower debt, does it create room for interest rate cut by RBI, Virmani said, "if we look at our own history and others, it is generally a bad idea to tighten both fiscal and monetary policy together in a period of shocks."

"So one has to be a lot more targeted. That doesn't mean one does only fiscal or only monetary, but the coordination has to be carefully done," he added.

Virmani pointed out that there is some information which suggests monetary and fiscal policies may have been too tight during the first two quarters of the current fiscal year.

"So I think that balance has to be restored to what I would say is more appropriate," he said.

Sitharaman, in her Budget for the fiscal year beginning in April, trod a fine line between fiscal prudence and providing a thrust to growth. She not only gave the middle class the biggest-ever tax relief but also unveiled a glide path for reducing fiscal deficit next year and lowering debt as a percentage of GDP by 2031.

The Reserve Bank of India (RBI) has kept the repo rate (short-term lending rate) unchanged at 6.5% since February 2023.

The last time the RBI had reduced the rate was during the Covid times (May 2020) and thereafter, it was gradually raised to 6.5%.

Newly-appointed Reserve Bank Governor Sanjay Malhotra will be chairing his first Monetary Policy Committee (MPC) meeting starting Feb 5.

Responding to a question on the trade war started by US President Donald Trump, Virmani pointed out that the new US President in his latest statement has said many countries have taken advantage of the USA, but not all.

"I think we fall in that 'not all' category...So, given that history and that statement, I am not worried about the direct consequences.

"But as I said, the indirect uncertainty has gone up, and we have to take account of that," he opined.

Trump on Feb 1 signed an order to impose stiff tariffs on imports from Mexico, Canada and China, fulfilling a campaign promise but raising the prospect of increased prices for American consumers.

Trump is declaring an economic emergency to put duties of 10% on all imports from China and 25% on imports from Mexico and Canada - America's largest trading partners - except for a 10% rate on Canadian oil.

(PTI)