Rupee Depreciation- Why Rupee is Depreciating?

By Ritz P / 2 Comments

Rupee depreciation Everybody talks about the subject in recent times. We are experiencing a tough time with Rupee depreciation every day. RBI is trying to arrest the fall, but the effect is very small. Let us analyze the effect of rupee depreciation:

How the rupee depreciation against the Dollar is calculated? Lets replace rupee with potatoes. Today, one US dollar can buy 45 potatoes. Next week 1 US dollar can buy 52 potatoes. Does this mean that potatoes have become cheaper since you can buy more potatoes for the same one US dollar? No, it does not mean that potatoes have become cheaper.It means that potatoes have depreciated in value.

The same is true for the rupee. When one US dollar can buy 45 rupees today and 52 rupees next week, it means that the value of the rupee has depreciated.

The past year has been disastrous for the rupee value against the dollar. The value of rupee against dollar has moved from 45 during August 2011, to almost 55 in November 2012. As per the experts, the Rupee will be volatile for some more time. This kind of increase in dollar value will have the drastic impact on the economy of a country like India, which depends too much on oil and other raw material imports.

How currency value is decided? There are many economic factors, which decide the value of a currency. A currency will tend to become more valuable when its demand is higher than supply. Exchange rates are expressed as a comparison of two currencies and it is always relative. Interest rates, rate of inflation and exchange rates are correlated.

What are the main reasons for rupee depreciation now?

Volatile Stock Market When the economy is performing well and the stock market is performing better than other countries, overseas investors will become heavy investors here. It is a known fact that Indian stock market is dominated by overseas investors. To invest here, they need rupee. This will increase the demand for rupee and will result in higher value for rupee. On the other hand, when these investors are pulling money out of Indian stock market, rupee will be depreciated. Indian market is in a bad shape for the last 2 years. The sentiments after the US downgrade and the European crisis etc. resulted in overseas investors selling rupee,buying dollars and rupee depreciation.

In a bad performing market, when there is depreciation in rupee, it will bring down the overseas investors real returns. So they will start selling, which will again worsen the situation.

The dollar is still the safest paper currency in the world! So, there is more demand for dollar in volatile condition like this. This will add to the rupee depreciation.

High Gold Prices Very high prices for gold have created panic among investors and fearing a bubble there, investors started moving towards dollar. This demand in dollar is also causing depreciation of rupee.

Inflation causing Rupee Depreciation Another reason affecting the currency value is inflation. We are experiencing very high inflation now. This will decrease the purchasing power of Rupee against other currencies. This will lead to rupee depreciation.

Current Account Deficit A current account deficit occurs when a countrys total import exceeds the total exports. This makes the country, a net debtor to the rest of the world. This is not good for the country because, the country needs to buy more foreign currency. More demand for the foreign currency will cut the value of that countrys currency. Indias current account deficit now is more than the projected level and this also contributes to the depreciation of the Indian rupee.

Political paralysis A major reason for Rupee Depreciation The parliament is unable to transact any meaningful business and reforms occupy a back seat. Coalition politics make things difficult for the government to push the much-needed reforms in many sectors. This is creating panic among overseas investors who want to invest in India.

Why and how RBI control exchange rate? RBI will interfere in this area because a steady value of rupee is essential for the orderly growth of the economy. A depreciating rupee will harm all import oriented businesses. This may help the exporters, who get their payment in dollars.

RBI will be watching the position and interfere to stabilize the currency value. In case of depreciation, RBI will sell foreign currency from the reserve and this will help in arresting the fall of rupee to some extent.

But there is a limit for RBI action, until the government is able to take some strong action on reforms.

Does rupee depreciation affect us in any way? What is your view on rupee depreciation?

- See more at: http://www.paisatalks.com/rupee-depreciation-why-rupee-isdepreciating.html#sthash.ohw5unee.dpuf

A depreciating rupee is an opportunity, not weakness

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June 29, 2012 14:50 IST

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All the opportunities available to China were also open to us. The need is for the government to set up the right incentives to make those opportunities profitable for the private sector, the rest will follow, says Sonali Ranade

From the beginning of March this year and end-May, over a period of three months, the dollar rose by
approximately 20 per cent, going from R48.50 to R56.50. The steep depreciation of the rupee came after the dollar was allowed to depreciate in value against the rupee from R52 in March 2009 to R44 in March 2011: a depreciation of 18 pc in the value of the dollar in Indian markets. Why did RBI allow the rupee to appreciate by 18 pc during the 2009-11 period? Is the current depreciation in the value of the rupee against the dollar justified? While these are valid questions, the debate on the external value of the rupee misses its salience to the broader economy. Japan, the Asian Tigers, and most recently China, have all industrialised and shown phenomenal growth rates using a cheap home currency to reorient their economies for rapid growth in exports. Indians used to be dismissive of such strategies on the plea that Japan and the Asian Tigers were "small" countries, which made an export-led growth strategy feasible. India, with a huge population and a large domestic market, needn't follow a similar strategy. Then came China with a population larger than ours and showed how a cheap domestic currency could be used to implement an export-led growth strategy with resounding success. Yet, we cling to tired old arguments, both unwilling and unable to export our way out of poverty. What accounts for our negative attitude to exports? The two largest items on India's import bill are crude oil [$100 billion] followed by gold [$50 billion]. These two items account for a little over 50 pc of our import bill. We produce little of crude domestically and virtually no gold. Yet, in the world markets we are third largest importer of crude and the largest importer of gold. An argument for keeping the rupee over-valued is that since India imports more than it exports, and as most of our imports like crude are price inelastic, India is better off keeping the rupee over-valued. The argument is deeply flawed at many levels. Firstly, remember that our current account deficit, which now is in the region of $90 billion a year, has to be financed. In other words, the excess of imports over exports every year has to be paid for by [a] borrowing on the international markets; and/or [b] selling other assets such as equity in our profitable companies to investors abroad. Since the '90s we have been financing the CAD by borrowing from NRIs, borrowing from other international investors and selling shares in Indian businesses through FII or FDI routes. Note, we started with borrowing from institutional investors in the '70s. When that source ran dry we turned to NRIs. In the '90s even that wasn't enough so we started selling the family silver -- shares in domestic companies and new businesses. This is not to say FII or FDI is undesirable. But we are not doing it to foster competition in domestic markets. We are allowing such investments primarily to fund the CAD. We have no other choice.

The simple fact is, no matter how attractive a strong rupee appears from a tactical standpoint, it leaves a huge CAD in its wake that has to be funded. We have been running a persistent deficit for the last 65 years and are running out of funding options. What little advantage we may gain in "cheaper imports" via a stronger rupee is lost by having to pay higher than normal for funds with which to cover the deficit. Hence, over time, a stronger rupee debilitates the economy and the shrinking funding options is what precipitates depreciation of the rupee! Therefore, a "strong rupee" actually causes a profoundly deeper weakness. Furthermore, a strong rupee sends out wrong price signals to the economy and sets up perverse incentives that perpetuate the deficit instead of correcting it over time. The fact is, nations cannot persistently spend more than they earn. There is a day of reckoning when nations too can and do go belly up. If we are running a persistent CAD that keeps growing every year, obviously deep structural changes are needed to correct the imbalance. On the import side, it obviously means curbing the use of crude and gold, to take the two largest items on our import bill. Instead of curbing demand we subsidise petroleum, oil and lubricant products, which promotes their consumption. Similarly for gold, by keeping real interest rates negative on bank deposits we force households to save via gold rather than via financial products. Were the real returns on bank fixed deposits positive after accounting for inflation, the investment demand for gold would disappear. But the government uses sly taxation of wealth saved in bank deposits to manage its fiscal deficit. In the process it sets up perverse incentives for gold imports. Elimination of subsidies on POL products would force the economy to be more fuel-efficient and cut the demand for POL by incentivising the development of other options such as solar or wind power. We often forget that subsidies hurt the larger economy by killing off innovation that would mitigate the current problem. Similarly, an explicitly stated policy of keeping yield on three-year fixed deposits at least one pc pa higher than WPI or CPI would not only force RBI to be more market-driven in setting interest policy but also eliminate the investment demand for gold. In fact, consistently followed, the policy could also free existing stocks for consumption demand and/or exports. The argument that gold imports don't hurt is absolutely fallacious. Not only are gold imports awfully deflationary, they are also far more expensive to the economy than to investors who buy if the rupee is over-valued. The notion that gold imports don't really add to the "real deficit" is equally off the mark. The privately held gold hoard is simply not available to society when needed. In 1962, when India was in grave difficulty over the war with China, frantic efforts to mobilise gold to buy arms mustered a paltry 30 MTs of gold. In contrast, we import about 1000 MTs annually now and our

accumulated holdings must be 20 to 30 times that amount. So let's not pretend that gold held by private households is easily available for a public purpose. That is an empty slogan. Why can't we step up our exports? Since independence, if you look at what we have accomplished by way of finding new markets for our exports, the picture is very revealing. In the '70s, we went to the IMF for a bailout. Increasing exports was a must. Casting about for a way out, the government discovered that unknown to it, several smart traders in Surat were importing small diamonds, using their own capital and connections, for polishing and cutting, and re-exporting them with handsome margins. The gems and jewelry industry, much like the software services industry, was born in the private sector and recognised only after it was well-established. The rest is history. Similarly, in the '90s a crisis forced us to devalue the rupee and the software services industry took off responding to the increased profitability that the 20 pc rupee depreciation gave them. In both, the basic arbitrage was labour cost. The gems and jewelry industry monetised cheap skilled Indian labour. The software industry followed. Are there no more opportunities to monetise our abundant labour? The fact is, such opportunities abound. All the opportunities available to China were also open to us. The need is for the government to set up the right incentives to make those opportunities profitable for the private sector. The rest will follow. Are our policy-makers too pusillanimous? Vast markets for agricultural products are opening up as people with higher income move up the food chain. China is now the world's largest importer of food and its markets are not closed by quota regimes. With our cheap rural labour, that is a huge opportunity given the right enabling policies for investment in agriculture. If such exports haven't taken off it is because we have archaic laws, poor infrastructure at ports, and lack of focus from policy-makers. Yet, as soya exports show, nothing is impossible. It would be in the fitness of things if the current BoP crisis, and the consequent depreciation of the rupee, is used as an opportunity by the government to open up the farm sector for investment in export-oriented agriculture since we now have a huge surplus in most agriculture crops except pulses. A depreciating rupee is an opportunity, not a weakness. Instead of being defensive, the government needs to launch a programme to educate people and business on how to benefit from it. For that to happen, the government needs to put its own policy-making shop in order.

Rupee depreciation adding to inflationary pressures: FM

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P. Chidambaram TOPICS macro economics inflation and deflation

prices

The government, on Wednesday, maintained that even as it had been taking a number of fiscal and administrative measures to contain the price spiral, it was the rupee depreciation that had been contributing to inflationary pressures. The decline in the exchange rate value of the rupee makes imports expensive. In situations where the higher cost is passed on to the consumers, it would contribute to inflationary pressures and general price rise, Finance Minister P. Chidambaram told the Lok Sabha in a written reply. Even as the rupee is now hovering around the 55.40-55.45 level against the dollar, after having touched a record low of 57.32 on June 22, and the WPI (wholesale price index) inflation also easing marginally to 7.25 per cent in June from 7.55 per cent in the previous month, Mr. Chidambaram said: The government has taken a number of fiscal and administrative measures to check inflation, which resulted in moderation of inflation to around 7-7.5 per cent in the recent months. The decline in rupee value, the Finance Minister pointed out, was mainly on account of supplydemand imbalance in the domestic foreign exchange market. This is due to widening trade and current account deficits and slowdown in portfolio flows on account of escalation in euro crisis and strengthening of the dollar in the international market, he said. To stem the rupee slide, the government and the Reserve Bank of India (RBI) had taken a number of steps to facilitate capital inflows, boost exports and, thereby, augment the supply of foreign exchange

into the country. Among the steps taken were a hike in the FII investment limit in debt securities, a higher interest rate ceiling for foreign currency NRI deposits and deregulation of interest rates on rupee-denominated NRI deposits. In another written reply, Minister of State for Finance Namo Narain Meena said The uncertainty in global financial markets due to recent developments in the eurozone had some impact on India. The government has been calibrating economic policies to mitigate the impact.

Falling rupee: Causes and perks

Faaria Tasin
THE story of the free falling Indian rupee has surely caught our eye. Many on the other side of the border are concerned about the adverse effects this will have on the Indian economy, but should we be worried at all? There are quite a few reasons for the depreciation of the rupee against the US dollar, a few of which will be discussed. According to the elementary law of economics, if the demand for US dollars in India exceeds its supply, then the dollars worth will go up and that of the Indian rupee will come down in that respect. The outlook of the US economy is better and is anticipating a good degree of growth, and the Federal Reserve has hinted that it may end its fiscal stimulus implying that the dollar supply will decrease. In the short term this can lead to the dollar becoming stronger than other currencies, including the Indian rupee. Crude oil is quoted and purchased in dollars. When the price of crude oil rises, more dollars are demanded which appreciates the dollar against the rupee, leading the rupee to lose its value. The volatility of the equity market in India may urge many foreign institutional investors to take money, i.e. US dollars, out of the country, leading to a fall in dollar supply. This can again lead to a fall in the value of the Indian rupee against the US dollar. Now, depreciation of a currency can also have its perks. Indians exports can rise. However, this may not be possible in the face of inflation in the Indian economy. Inflation will increase the price of raw materials and diminish the competitive gains from depreciation. Similarly, we can also think that Made in India products can now flood the Bangladesh market since the cost of rupee in terms of taka has fallen. However, if inflation rises, we cannot really reap the benefits of the falling rupee. Bangladeshi exports to India can move either way; exports can decline as India may buy less of Bangladeshi products since importing is more expensive now. Inflation in both countries should also be taken into account. Bangladeshs exports to India can also rise; if inflation rate is high in India, then Bangladeshi products can be relatively cheaper and it can still pay off to import from

Bangladesh. If inflation rate is close in both countries then Bangladesh is likely to take advantage of the falling rupee and import more from India, at least in the short-run.

FALLING RUPEE IN INDIA CAUSES AND IMPACTS Thu, Sep 5, 2013 Social Issues We invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own. - Lionel Trilling, American literary critic. The most concerning chapter for India during last two years and specifically last two months is the weakening of rupee against dollar. It is not only that rupee has lost its value in the global context but also dollar has improved its performance in the global trading markets. The outstanding performance of US equities and the improvement in the labor market has made Americans more optimistic about the US economy, thereby stimulating greater hopes of QE(Quantitative Easing) tapering. The government of India is still unable to generate heavy capital inflows.If US Federal Reserve withdraws its bond buying programme; there will be unexpected outward flow of money leaving India clambering for dollars. The slowdown in the Indian economy has made the situation more fickle. The government has a strong role in controlling currency in the form of policy regulation and reforms. The current UPA leadership has failed to strike with some heavy reform to generate more cash inflows. As a result the government has gradually lost its control over rupee depreciation. Investors sentiment plays a pivotal role over here. Oil and gold imports account for 35 per cent and 11 per cent of Indias trade bill respectively.There has been an uninterrupted demand for the dollar from the oil importers pushing the rupee lower. Likewise the falling gold prices have made the central bank to reduce imports, which increases CAD and hits the currency directly. Indian economy requires a strong structural reform to maintain a positive balance of payment. Also, government spends excessively as election approaches just to woo electorate votes. This causes the rupee to depreciate. Then the government beats around the bush to control the currency behaviour. Most of the times these measures worsen the economic crisis to a great extent.

The foreign institutional investors have been selling index futures and Indian equity market is weakening. As a result there is a heavy demand for dollar and Indian currency as well as economic situation is looking too gloomy. These worries, combined with a record high current account deficit and now uncertainty over the central banks monetary policy stance, have prompted foreign investors to sell more than $12 billion of Indian debt and equities since late May. Reserve Bank of India has taken certain steps and some more to be followed to have a control over rupee. But the big question comes here. what are the implications? And is it that bad overall?? The best business prototype anyone can have is to spend in rupees and earn in dollars, which is what the giants of India Inc, including the top IT companies, excel in. Basically the sector which is targeting exports for its industrial operations are the one wins the game. Dollar appreciation would be positive for sectors such as IT, pharmaceuticals, hotel, textiles and automobiles which have the total foreign exchange earnings of these firms are far greater than their forex spends. As much as the rupee weakens, the foreign exchange earners gain provided the other factors remains constant. A sharply declining rupee triggers inflation, broaden the current account deficit, hits investor sentiment and creates burdens for organization with high exposure to foreign debt. The government and the Reserve Bank of India have taken several reform initiatives to resist the downturn, but their success stories are looking gloomy. Buying imported materials will become very costly. A weak rupee will create extra stress on Oil Marketing Companies (OMC) and this will surely be passed on to the consumers as the companies are allowed to do so after the deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will trigger inflation. If the depreciation is steep and without control, it will strike up inflation. As a result the Central bank would have very less room to impose further rate cut and thats the burden the borrower would have to bear. Indians who have gone to abroad for tours or studies are highly affected in these times. The only smiling people in this context are the NRIs who gain more on sending money to their homeland. As a whole we can say that though weakening rupee is the reason for someones smile it is a real threat for the countrys overall fiscal health and increase the current account deficit heavily. But in my opinion this huge downgrade is a temporary phenomenon and the rupee is really oversold. Now the Central bank and Government should work hand in hand and find out the policy measures to stabilize the

frightening scenario. I personally hope a further cut in SLR to ease the liquidity to save rupee and also import duty hike in gold and other related materials. RBI can buy bonds to ease liquidity in the market. Finally we can say that the situation is tight and challenging for us, but we can not only hope for the best but also should contribute the most to get back Indian economy in the driving seat.

Fall of Rupee: Causes, impact and the role of RBI Wed, Feb 1, 2012 In Focus The fall of rupee vs. Dollar has created the same conundrum what the rupee appreciation caused in year 2007. However, the impact has reversed this time with exporters making appreciated revenues and the importers feeling the heat. The increased demand for dollars vis--vis the India rupee has led to a sharp depreciation with rupee falling close to 18% from the Aug 2011 levels, and hitting an all time low of 54.32/USD on 15th December 2011, making it the worst performing Asian currency of the year. Taking a closer look at these issues, the fall in rupee can be attributed primarily to 3 broad factors.

Firstly, the grim global economic outlook, essentially due to the European debt crisis. Due to turbulence in European markets, investors are considering dollars as a safe haven for their investments in the longer run. This led to an increased demand for dollars vis--vis the supply for rupee and thus the depreciation. Another line of thought could be that while investors are shifting from European markets, why are they not investing in the Indian markets? The Indian economic scenario for the entire 2011 has been plagued by high rate of inflation, hovering above 8%, and extremely low growth in manufacturing sector. The HSBC-PMI (Purchasing Managers index) fell to 51 in the month of December 2011. The cumulative effect of these factors is leading to a shift in investor sentiments towards dollar market. Secondly, the fall in rupee can be largely attributed to the speculations prevailing in the markets. Due to a sharp increase in the dollar rates, importers suddenly started gasping for dollars in order to hedge their position, which led to an increased demand for dollars. On the other hand exporters kept on holding their dollar reserves, speculating that the rupee will fall further in future. This interplay between the two forces further fuelled the demand for dollars while sequestering its supply from the market. This further led to the fall in rupee. Lastly, there has been shift of FIIs (Foreign institutional investors) from the Indian markets during the current financial year 2011. FIIs leads to a high inflow of dollars into the Indian market. As per a recent report, the share of Indias FII in the developing markets has decreased

considerably from 19.2 % in 2010 to 3.8% in the year 2011. As FIIs are taking their investments out of the Indian markets, it has led to an increased demand for dollars, further leading to a spiraling rupee. Encompassing all these factors, there is a lack of firm initiative by government on issues such as allowing FDI in retail. Recent debacles such as 2G have further rendered the Indian market unattractive to a certain extent. Evaluating the impact of the falling rupee on the Indian economy The first major impact of the falling rupee can be seen on the rising import bill. India imports close to 70% of its net fuel requirements. This means the companies importing oil have to shell out more rupees for the same dollar invoices. As is clear from Fig.1 although the price of oil has gone down from $118 per barrel to $109 per barrel, not much benefit can be derived since exchange rate too shoot up from Rs. 44 to Rs. 52.7 a dollar.. Instead, the price of importing oil increased to an extend of RS 489 (as is clear from Fig2 (b)). This has severely impacted the bottom line of these companies as well as the subsidy bill of the Indian government. Huge buying of dollars from the market in order to meet the import bill has further added to the existing woes. Additionally, the falling rupee has added further to the inflationary pressures, as imports have become costlier and thus increasing the prices of key commodities such as oil, imported coal, minerals, and metals. However the falling rupee has substantially appreciated the revenues for the exporters, who receive more rupees for their dollar receipts. These industries include the IT Services industry, textiles and other export oriented industries. Increasing imbalance in trade i.e. increasing imports over exports is bound to have severe impact on countrys fiscal deficit, which is pegged to increase by .8 percentages to 5.4% of GDP from the originally estimated value of 4.6% of GDP.

Figure 1 oil prices and exchange rates Source RBI Role played by RBI: RBI has been extremely cautious in its intervention during the entire rupee depreciation crises. RBI has however reacted with timely interventions by selling dollars intermittently to tame sharp fall in the currency. The outflow of dollar reserves from RBI coffers has been extremely cautious, mostly due to the dwindling foreign exchange reserves. The foreign exchange reserves of India in December 2011 stood at 270 billion USD. Recently RBI has intervened with key policy initiatives such as intervening in the forward contracts policy. As per new RBI policy the cancelled forward contracts cannot be rebooked. Exporters in order to rake in more profits, were booking forward contracts, then cancelling the contracts, and again rebooking at better rate. This process led to a further depreciation in rupee and fuelled speculations. Also, RBI intermittently put trading limits for the banks in the foreign exchange market in order to tame the speculative forces.

Looking at the current economic outlook, the currency crises seems to stay for a much longer period this time around. However, a structuring of Greek debt coupled with higher inflows from FIIs can lead to an arrest in the falling rupee. Why the rupee might reach 70 against dollar Raghu Kumar | Updated On: September 03, 2013 10:49 (IST)

Exchange rate can be best understood as nothing more than a benchmark for a nation's money supply. When the rupee depreciates against the dollar, it simply means value of the Indian currency has gone down relatively against the greenback. This can happen because of two things: 1) increase in rupees in the market; or 2) decrease of dollars in the market. So how does this affect money supply? One of the major duties of the governor of the Reserve Bank of India (RBI) is to essentially continuously decide supply of the currency in India. However, Raghuram Rajan, the newly appointed RBI governor who will officially take over the reins on 5 September, has a difficult situation on his hands. With the rupee on a seemingly continuous free-fall, he could accomplish two tasks in one shot: control India's rising inflation, and control the depreciation of the rupee, simply by limiting supply of the currency. Seems like a win-win situation, right? Unfortunately, Mr Rajan will be taking on one of the most challenging roles in the nation as RBI governor. Let's first look at how and why the rupee has gotten to its current position. One of the most important questions that many are asking is why the rupee has fallen to its current state. It is important to know that the rupee's value is directly linked to the amount of US dollars available in the Indian market. India receives dollars in three ways: through exports, through foreign investments into India, and through NRI remittances into India. The less dollars there are in the market, the more the dollar is worth (basic laws of demand and supply), and, so, the rupee depreciates. India's main import is crude oil, and the countries it imports from unfortunately only accept US dollars or other major currencies. Therefore, it is critical for India to always have a large supply of US dollars or other major currencies within its system. The current account deficit is a measure that easily tells us the difference between

exports and imports, and, hence, is a good indicator for the the supply of US dollars and other major currencies. If a country's current account deficit is seen rising, it means that the country is importing more goods than it is exporting. In case of India, each successive month the current account deficit has been rising at a dangerously alarming rate. This is a worrying sign, and it very well could be the largest contributor towards the rupee's depreciation. One of the reasons for the rising account deficit is the fact that India is a heavy importer of crude oil and, of course, gold. On 14 August, the government decided to impose a 10 per cent import duty on gold, a knee jerk reaction to the rising current account deficit. That did nothing to stop the rupee from further depreciation. The current account deficit can be stimulated through other means, not just by controlling the money supply- and this will be Mr Rajan's biggest challenge. By limiting the money supply, inflation and, potentially, the rupee's value would be controlled- but it would severely impact the country's growth. India's gross domestic product (GDP) has dropped from 6.2 per cent to 5 per cent in latest fiscal year, so India's growth would be hampered by lowering its money supply. Instead, Mr Rajan should look at the past. Over the past 24 calendar months, India's money supply grew at around 29 per cent, while it's GDP grew at a much lower pace. This essentially means that more rupees were printed than required, which caused a rise in inflation. To control India's high current account deficit, Mr Rajan should do the exact opposite of what the current RBI governor has done, which was to impose capital controls on local companies by limiting Indians' ability to sell rupees. Investors took this as a cue for panic, and the rupee began to spiral out of control. Instead, Mr Rajan should let the markets remain open and democratic- eventually, Indian goods will be cheap enough to a point where they will be easily exported. India's urbanisation is not going to stop, wages will continue to rise, and inflation will be controlled since the money supply can be kept at par with GDP growth. The rupee will probably rise in the short term and very well could rise to 70- but at a certain point, equilibrium will kick in. There is a high level of pessimism in the markets. The government needs to address the rising current account deficit and slow growth until optimism finally settles in. Raghu Kumar is the co-founder of RKSV, a broking company. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.