Some calibrated depreciation would be desirable and healthy for the economy, said Sajjid Chinoy, Chief India Economist of JPMorgan.
“Six percent real depreciation in trade-weighted terms we had in the first six months of the year was healthy,” he said, adding that what we are seeing now is India keeping abreast with other emerging markets.
In the last two months, the dollar strengthened against most currencies in the world. However, in the last 10 days, though the dollar hasn’t strengthened against other developed market currencies, the EMs with current account deficits are having to pay a premium.
What the central banks can do is use buffer stocks of forex reserves to smoothen the move and ensure that macro fundamentals remain strong, said Chinoy.
“We should not panic because this is not India specific and is happening across all emerging markets and therefore just weather this move out,” he reiterated.
He also specified that in this environment, no central bank can artificially target bilateral level against the dollar – economically, it does not make sense and it is also not sustainable. However, the central banks can allow two-sided volatility, so that once the stress abates and there is pressure for EM currencies to appreciate, the rupee would also be allowed to appreciate.