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Rupee's Decline Attributed to US Dollar Strength, Says Former RBI Governor

Rajan explained that the primary factor behind the rupee's fall is the appreciation of the US dollar, driven by market expectations of a reduction in the US trade deficit under the new administration and the safe-haven buying of dollar assets.

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Rupee's Decline Attributed to US Dollar Strength, Says Former RBI Governor Raghuram Rajan

Rupee's Decline Attributed to US Dollar Strength, Says Former RBI Governor

The Indian rupee's drop to a historic low of 86.59 against the US dollar on Monday has raised concerns, but former Reserve Bank of India (RBI) Governor Raghuram Rajan provided a balanced view, attributing the rupee's depreciation mainly to the strengthening of the US dollar, rather than domestic economic factors.

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In an interview with Mojo, Rajan highlighted that the US dollar has been gaining strength against multiple currencies, including the Euro, which has depreciated by about 6-7% since last year. He noted that the rupee's decline, from 83 to 86, is relatively moderate in comparison to other global currencies.

Rajan explained that the primary factor behind the rupee's fall is the appreciation of the US dollar, driven by market expectations of a reduction in the US trade deficit under the new administration and the safe-haven buying of dollar assets. Despite this, Rajan expressed confidence, stating, "I wouldn’t be overly worried" about the situation.

Rajan also pointed out that the real effective exchange rate of the rupee, which adjusts for inflation and considers the exchange rate against all countries, hasn't depreciated significantly. He added that a modest nominal depreciation could potentially benefit Indian exports, especially in the face of global tariff hikes.

The rupee’s steep decline on Monday, which coincided with rising crude oil prices, was followed by a 21 paise recovery on Tuesday as crude prices eased and the dollar retreated. This fluctuation came amid India’s declining foreign exchange reserves, which dropped to $634.59 billion as of January 3, from an all-time high of $704.885 billion in September.

When asked about the Reserve Bank of India's (RBI) potential intervention, Rajan stated that interventions should only be made to manage short-term volatility. He advised against intervening in adjustments driven by fundamental economic factors, such as the strengthening of the dollar.

Rajan further elaborated on the potential impact of Foreign Institutional Investment (FII) flows, noting that while these inflows had previously favored India due to its strong growth and political stability, China’s emerging market stimulus has attracted some portfolio rebalancing. Despite this, Rajan reassured that the adjustments were natural, and there was no immediate cause for panic.

In conclusion, Rajan emphasized that while the dollar's strength is likely to continue for a while, there is no urgent need for concern over the rupee's fluctuations.

Also Read: Rupee Gains 8 Paise To Recover From All Time Low Against US Dollar

Reserve Bank of India (RBI) Indian Rupee US Dollar