Somnath Mukherjee, CIO & Senior Managing Partner at ASK Private Wealth, says a depreciating rupee is a "shock absorber", as it gives policymakers room to focus on jobs and generating growth. He says that it is the ideal time for the rupee to weaken, given India's relatively low inflation print.

New Delhi

The depreciation of the Indian rupee is acting as a shock absorber, granting policymakers more freedom to focus on economic growth and job creation rather than defending a particular currency level. With inflation rates currently at historic lows and inflation expectations subdued, experts suggest this is an optimal period for allowing the rupee to adjust according to market forces.

India continues to face high tariffs from the United States, making currency depreciation a practical short-term measure to support export competitiveness. The rupee is expected to remain under pressure due to ongoing net outflows from foreign portfolio investors, but the situation is not considered alarming as the current account remains manageable.

How the Indian rupee's slide is helping policymakers

Yes, so essentially the fall in the rupee is a shock absorber. The way we see it is an adjustment in the value of the currency allows the policymakers enough freedom on the monetary and fiscal policy side to do what is really important, to focus on what is really important, which is growth and jobs, rather than be fixated on a specific level of the rupee. As is the case with anything else, rupees' value will be determined by demand and supply in the market. Currently, the demand supply situation, as far as rupee and dollar is concerned, is indeed a little bit tight, and hence rupee is reflecting that value. From that perspective, it is great that the rupee is actually being allowed to find a level that is market determined, rather than the policymakers trying to defend a level of the rupee. Bear in mind the fact that India's inflation print, as you mentioned just a little while earlier, is coming in extremely low, and inflationary expectations are actually amongst the lowest that we've seen in many, many years. If there was a timing element to this, this is the best time that policymakers could use to let the rupee depreciate. Also bear in mind the fact that there is no hurry, it looks like, in terms of India settling the tariff situation with the U.S. Which means that India remains, right from the Straits of Bosphorus to the Straits of Malacca, the most tariffed country by the U.S. in this entire region. Which means that our trade-weighted tariff rate is about 2x that of the rest of Asia. A rupee depreciation is the only meaningful, quick, and relevant measure that India can take in the short term to protect a measure of its market share in the global export, especially in the U.S. export market. So you put all of this together and there seems to be no major downside to letting the rupee fall and find its own level, given the demand-supply dynamics in the market. Do you think the fall in the rupee is now done, though? I would say that it will remain under pressure till the time we have a bit of a reversal from capital flows. The big reason why the rupee started being under a little bit of pressure over the last few weeks is not so much the trade account, the current account is coming in still at a very manageable 1-1.5% around that level of GDP. What is really causing the tightness is a shortness or a net outflow in terms of capital flows, especially foreign portfolio investor flows. It will remain under pressure till the portfolio investors, the FPI flows, don't do a bit of a reversal. But yeah, is it at a stage where we start getting worried? Not at all.

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