“The fate of the rupee is to depreciate because our inflation is higher than our trading partners and our productivity is lower than our trading partners,” Shah told reporters here.Shah, a MF veteran, added that a 2-3 percent depreciation of the rupee makes sense given the imbalances.
The flows may vary in the short term and affect currency levels, but there is no scope for permanent appreciation of the rupee, Shah said.
Considering the inflation and productivity situation, the depreciation of the currency is also essential from the perspective of export competitiveness, he said.
He added that the real effective exchange rate model also suggests a depreciation of the rupee by 2-3 percent.
Shah also appreciated the role played by the RBI and said the central bank lets the market decide the level of the rupee and intervenes only to limit volatility.
The direction of the rupee will be determined by the market, the EAC-PM member made it clear.
“Right now, based on the data released by RBI, they may have short-term rupees in NDF (non-deliverable forward) and in the local market between USD 50-70 billion. So, they have intervened to reduce the volatility of the rupee, but the direction will be determined by the market,” he said.
When asked whether 90 per US dollar is the new standard for the domestic currency, he replied in the affirmative.
The level will be maintained even if India concludes the trade deal with the US, which has been under negotiation for some time, he said.
Meanwhile, Shah also backed the call to revisit Press Note 3 – a government notification issued in 2020 to curb investments from neighboring countries into India.
He said India will have to find ways to attract capital flows, and foreign direct investment is a very important tool.
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