The weakness in the rupee isn’t a cause for worry as it’s overvalued when compared with the real effective exchange rate that factors in inflation, according to NITI Aayog Vice Chairman Rajiv Kumar.
“The rupee is overvalued by five to seven percent compared with the REER. The current weakness (in the local currency) isn’t comparable with that in 2013,” he told reporters at a conference in Delhi. “India’s in a much better place… we’re nowhere near as vulnerable as we were in 2013.”
The REER is the weighted average of a country’s currency in relation to an index or a basket of other major currencies, adjusted for inflation. Kumar said in 2013, India’s inflation rate was higher than the global rate. The rupee weakened by Rs 6.81 in 2013 — breaching the then low of Rs 68.84 against the U.S. dollar — during the tenure of the UPA-II government.
The local currency is Asia’s worst performing in 2018 and hit an intraday all-time low of 69.09 against the U.S. dollar on Jun. 29. due to multiple headwinds like weak global cues and inflation concerns.
There’s no need for intervention in the currency market, Kumar said when asked about the strategy to control the rupee’s weakness. The Reserve Bank of India will never interfere directly to protect the rupee, he said, adding that the central bank acts only to control its volatility.
The LIC-IDBI Bank Deal
Kumar hoped the Life Insurance Corporation of India, India’s largest insurer, will make “good money” by investing in IDBI Bank Ltd.
“... they [LIC] have changed the management of IDBI Bank, and I [personally] know the person who has taken charge. He’s one of our best bankers, best professionals,” Kumar said, while referring to the government’s appointment as B Sriram as chief executive officer and managing director of IDBI Bank for three months.
BloombergQuint had reported last week the Insurance Regulatory and Development Authority of India allowed LIC to increase its stake in IDBI Bank to 51 percent. LIC will invest between Rs 10,000-13,000 crore in the troubled state-run lender in tranches as part of the capital infusion plan.
Kumar likened the infusion with the U.S. government’s $700-billion bailout of American banks in 2009 in the aftermath of the 2008 global financial crisis. “The (U.S. government) later made very good money when the equity rose.”