I am not too concerned about rupee hitting an all-time low: Raghuram Rajan

Moneycontrol News

The rupee on Thursday hit a fresh record low of Rs 70.32/USD for the second consecutive day in row, but former RBI governor Raghuram Rajan, in an interaction with CNBC, said that he was not too concerned about the domestic currency as "it is more a factor of dollar strength rather than necessarily rupee weakness".

On Thursday, the rupee opened at record low 70.19 against the US dollar and further slipped to 70.26. It hit 70 to the dollar for the first time on Tuesday, falling 15 paise intraday due to a sharp depreciation in Turkish lira.

The rupee has fallen more than 9 percent year-to-date and around 2 percent in August

“The rupee has been strengthening in real terms for some time now while inflation rate has been modest but above world inflation rates and as a result the rupee needs modest weakening over time. Hence, I am not too concerned about the rupee hitting an all-time low,” explains Rajan.

“Currency weakness is a factor of dollar strength rather than anything else. But, I would say that investors should look at countries with large current account deficits as well as high level of debt,” he added.

Rajan believes that the state of emerging markets is way better than what it was in 2013 when we had the taper tantrum. Commenting on Turkey, Rajan is of the view that Turkey is an outlier in terms of leverages built-up over the years as well as the quality of policies which has been pretty bad.

The Turkish currency, lira, has been making headlines after depreciating around 80 percent against the US dollar so far in 2018. The steep fall has rattled investors globally, with the currencies of other emerging markets too coming under pressure.

“It may be early days to say that it will have a contagion effect because Turkey is special. But, there are other countries which are in some situation of fragility because they have upcoming elections, have large current account deficit and fiscal deficit,” explains Rajan.

What could be done to stabalise lira?

Rajan lists out a certain measures which could help the country to stabilise the currency which includes: taking control of inflation which could be done by increasing interest rates, having a serious inflation target, bring more central banking dependence which should help in stabalising the currency.

Also, the amount of leverage which has built up over the years is clearly a concern. Turkey saw an enormous increase in the private sector debt and a lot of it is foreign exchange denominated which is contributing to the problem, said Rajan.

Original Source: https://www.moneycontrol.com/news/business/markets/i-am-not-too-concerned-about-rupee-hitting-an-all-time-low-raghuram-rajan-2848621.html