Policy paralysis factor behind rupee's fall

The Reserve Bank of India (RBI) on Thursday said the perception of a slowdown in policy making had impacted the foreign exchange market and led to the recent depreciation in the rupee. Other factors included India’s widening current account deficit and turmoil in the Euro zone.

The rupee has fallen about 30 per cent against the dollar since its peak in August 2011. The trend was broadly in line with the wider trend seen in currencies of countries with high current account deficits, the central bank stated in the Financial Stability Report released on Thursday.

It also added adequacy of reserves had emerged as an important parameter in gauging a country’s ability to absorb external shocks. India’s foreign exchange reserves had fallen moderately in the period under review, it stated. The rupee’s depreciation had taken a toll on equity markets as well. The dollar rate of return to foreign investors had fallen with the depreciation in the rupee, and this had made Indian equity markets unattractive, the central bank added.

The flow of foreign funds could be further hit in the case of a sovereign rating downgrade, RBI cautioned in the report. “A rating change could have some cliff effects,” it stated, adding this could affect the availability and cost of foreign currency credit lines for Indian companies. India’s current external rating stands at BBB-, an investment grade.