The rupee riddle | Mint

As policy choices get complicated, one factor that could worsen the Reserve Bank of India’s (RBI) headache is the weakening of the rupee. On Wednesday, it closed at a new record low of 83.14 against the dollar, extending Tuesday’s fall to 83.04. Its decline owes to a rise in crude oil prices (Brent prices breached the $90 per barrel mark) and the dollar gaining strength globally. Since oil is India’s biggest import, a rise in its international prices—set in the American currency—raises the likelihood of local importers converting more rupees into dollars needed for shipments. Also, as fresh signs emerged of China’s services sector slowing, investor money moved to the US in search of a haven amid rising concerns of a global slowdown. A weakening rupee could inflate our import bills and stoke local inflation, even as export markets are too weak for it to help exports much. Of course, RBI has deep dollar reserves that it could use to sell the US currency in the exchange market to support the rupee. But, such intervention is meant only to smoothen volatility and not determine its value. With so many variables in play, though, complex calculations will guide its actions.