The sharp correction in the Indian rupee over the past few days is welcome. The currency has fallen to its lowest level in six months as foreign portfolio investors continue to pull money out of Indian financial markets. The ongoing talk about fiscal expansion has also put pressure on the rupee.
The Reserve Bank of India (RBI) has been under fire for allowing the rupee to strengthen over the past year, though most emerging market currencies have also gained because of the fall in the dollar index. It has bought enough dollars to take its foreign exchange reserves to record levels but even that has failed to prevent rupee appreciation. The excess liquidity in the domestic money market also restricts the space for intervention in the currency market. Critics of the central bank say that Indian exporters have been priced out of the global markets because of the strong currency.
The weakening of the rupee needs to be seen against this backdrop. The important question is what a weaker rupee will mean for domestic inflation, especially of fuel prices.