Raghuram Rajan: Rupee's decline linked to stronger dollar, not domestic woes

Attributing the fall in Indian rupee solely to the US dollar getting stronger, former Reserve Bank governor Raghuram Rajan has said any intervention by the RBI on this can end up harming Indian exports even as he urged policymakers to focus on creating more jobs and boosting household consumption.

Impact of Trump's Policies

Asked what the second term of US President Donald Trump means for the global and Indian economy, Rajan said, "I think it means uncertainty. President Trump during his campaign laid out a bunch of policies and measures that he wants to implement." "We are seeing some of them being implemented. We have to see how intensely, for example the policy on immigration and trade and tariff proposals against whom and against which sectors are implemented. As of now what and how all this will pan out," the eminent economist said.

Dollar Appreciation Factors

On appreciation in the US dollar and its impact on other currencies especially in emerging markets including rupee, Rajan said the dollar has been appreciating against other currencies, partly due to fear of Trump tariffs. "If he imposes tariffs, it is going to decrease US imports from other countries, narrowing the current account deficit and the trade deficit. So, from that perspective, it means that the US needs to import less and so dollar will strengthen because there would be fewer dollars in the rest of the world. So, that is the straight forward reason," the former IMF chief economist said.

Investment Trends in the US

"There is also a view that the US is becoming more attractive as an investment venue because the people who can't export to the US will move their production to the US. Also, you are seeing more capital flowing into the US and that is also leading to a stock market boom and also strengthening the dollar," he said. All these reasons, along with the US economy growing very strongly, are leading to a stronger dollar, he added.

RBI's Intervention Stance

Asked if there is not anything that the Reserve Bank of India can do to arrest dealing rupee, Rajan said, "I am not sure whether RBI should do anything because every other currency is depreciating against the US dollar because if it tries to elevate rupee vis-a-vis dollar, it will be essentially strengthening rupee against all other currencies and that would make it more difficult for our exporters." "So, I will be careful about that. I will only intervene if the depreciation of rupee is really abrupt and creates a lot of volatility. That has always been the RBI's motive for any intervention, that is to reduce volatility and not to try and change the eventual level of rupee," he added.

Market-Driven Currency Value

"I think the Reserve Bank has not acted in hurry and it is also not done any intervention with an aim of preserving the value of rupee at some particular level. It has always allowed the market to find its own level," he said.

Impact on Foreign Direct Investment

Asked whether the US becoming more attractive investment destination is happening at the cost of another country and can it have any impact on India as an investment destination, Rajan said, "The idea behind tariffs is to reshore production, so it will have an impact on foreign direct investments of other countries." Instead of investing in other countries, people will invest in the US, he said.

Concerns Over Economic Growth

On expectations from the Union Budget in India, Rajan said, "We do need to worry about the recent slowing of economic growth." "Of course, one quarter does not tell the whole picture but it has come after we were growing very slowly before the pandemic, then during the pandemic, there was a little bit of crash and then we recovered," he said.

Need for Sustainable Growth

"The worry is that a lot of the strong growth in recent years was a recovery growth and now we have to build a sustainable growth. And that sustainable growth will come from having big investments and consumption growth," Rajan said. "We have worries on those two fronts. Private investments have not picked up."

Household Demand Insights

"When we look at demand, earlier it was middle class and lower middle class which were soft on demand, for example on two-wheelers, and now it is the upper middle class where demand is softening," he said. Household demand for consumption comes when households feel comfortable and when their jobs and income are growing, Rajan said.

Focus on Job Creation

"Recently we have seen worries about jobs people have and the kind of income they have. For these reasons, I will suggest that the focus in the budget is how we create more jobs, create better jobs and create more confident households," he said. "More households consuming more will result in private industries investing more. So it is a virtuous circle and we need to figure how we fix this," he said.

(Except for the headline, nothing has been changed by All India News Network in the PTI copy.)