Take steps to kick-start the stalled reforms

Hurt by dollar demand from oil firms and gold importers as well the broad risk-off sentiment, the rupee hit a record low against the dollar for a second consecutive session on Friday and posted its worst weekly fall in nine months. A suggestion by the Reserve Bank of India (RBI) that the state-run oil firms steer 50 percent of their dollar purchases via a single state-owned bank, has failed to arrest the fall. Analysts predict that, dragged down by the momentum from the worsening global risk environment, the Indian currency could continue to fall further in the near-term. At a time when crude oil prices have fallen dramatically to an 18-month low in the international market, the continued volatility in the value of rupee has hampered extending this relief in the form of reducing retail petrol prices across the country.

The RBI has said the sharp depreciation of the rupee has been driven by a combination of global as well as domestic factors.  The finance ministry has said that the government and the central banker are taking steps to arrest the fall of rupee. In addition  to the RBI’s suggestion to oil firms for single window purchase of dollar, the government has been taking supportive measures to encourage flow of foreign exchange into the country.

The depreciation of the Indian currency may ultimately help exporters in the long run and make some sectors such as software, pharmaceuticals, auto ancillaries and textiles look more attractive for investors. However, the scope for the RBI and government intervention is limited. The only answer to address the problems of Indian economy is for the government to cuts current account deficit, control the relative inelasticity of imports and take effective measures to contain high inflation. This will necessitate cutting down wasteful expenditure on populist schemes which neither create assets nor contribute to economic growth and take urgent steps to kick-start stalled second generation reforms which the government has been avoiding.