The BRICS nations finance ministers were meeting at the headquarters of the International Monetary Fund (IMF) to discuss the global economic situation and consider how they (the BRICS nations) could contribute to the beleaguered European countries overcome the current problems of public debt overhang and threats of default.

Let alone helping the European nations, any faster slide in the exchange rates of these major emerging economies could in fact introduce another destabilizing factor in an already uncertain global situation. Whether as a matter of deliberate policy or under circumstances, the currencies of these countries are swinging. In relation to the US dollar, the Brazilian real has depreciated by 19%, Russian rouble by 14% and the South African rand by 15%. Indian rupee has meanwhile depreciated by 9%. In the midst of this currency turmoil, the Chinese renmenbi has appreciated by 1%. Thus, the Chinese currency has in a way maintained its parity with the US dollar which has been an issue of bitter quarrel between the two countries. It is not as if the currency war might start; it has already started.

But there is surely need for dialogue among nations for orderly currency markets. In a way, the currency war –if we look at it in this manner—are an offshoot of some real economy developments. As we have seen earlier as well, global economic turmoil affects the exchange rate of the rupee. Since the beginning of the current spate of uncertainties over the Greek default rumours and US downgrade, the financial markets have been unstable. The stock market has swung rapidly and the exchange market has also been fluctuating rather widely. The latter is now having an impact on the whole economy.

Firstly, the depreciating rupee will add further pressure on the overall domestic inflation, which is already high. The rupee has depreciated by approximately 9% between August 1 and September 21 which directly makes all imports costlier. With the US Federal Reserve last week announcing a tranche of interest swap scheme only and its refusal to come forth with another round of Quantitative Easing, the dollar might be expected to appreciate further. The import of the US Fed move is that dollar supplies will not immediately be increased. However, some long-dated securities will be issued to buy up short dated securities which should actually roll over payments obligations. Most of our trade being conducted in dollars, any depreciation of the rupee will have a direct impact on the landed costs of all imports.

Secondly, since India is structurally an import intensive country, as reflected in the high and persistent current account deficits month after month, the domestic costs will rise on account of rupee depreciation. The rupee depreciation will particularly hit the industrial sector and put higher pressure on their costs as items like oil, imported coal, imported industrial intermediate products all will become costlier. Take for instance, only one item, oil. While recently oil prices have gone down, the retail prices should go up in consequence of the rupee depreciation alone.

Brent crude oil price, for example, was $116.8 per barrel on August 1 when exchange rate for the rupee was Rs44.07 to a dollar. On September 21, oil price had gone down to $110.4 per barrel and exchange rate was Rs48.33 to a dollar. Thus, because of the rupee depreciation we did not get any benefit of the lower oil price. Instead, the import price should be higher by Rs188 per barrel only on account of rupee exchange rate depreciation. Oil being our single largest import item, this will have substantial cumulative impact, you will appreciate.

Thirdly, the depreciating rupee will hit the already slipping fiscal deficit. As imported oil and petroleum products get costlier in terms of rupees, the subsidy burden should also keep inching up. Admittedly, the petroleum prices have been revised upwards since recently. However, it might be difficult to jack up the prices every time rupee slips and cover the domestic costs. The government as well as the oil companies – which are already in dire straits because of under-pricing of petroleum products – are likely to face higher subsidy bill and under-recovery if this trend is not checked.

These will be the consequences of the continued slide in rupee value in terms of dollar. Currency fluctuations might seem distant and esoteric and of little to ordinary citizens as long as they are not travelling abroad. Not so. These fluctuations affect our daily lives in some remote indirect ways by cutting holes in our pockets. Does that mean we should have a managed exchange rate mechanism?

No. We are not suggesting that India should have managed currency mechanism (like say China) even though that can give certain advantages for a while. However, there is reason to believe that some intervention from the Reserve Bank could become a critical stabilizing influence. Indeed, Reserve Bank had earlier intervened at times when the rupee was appreciating to protect the interests of Indian exports. Now the central bank should think of intervening in the interest of overall economy and as part of its inflation management strategy.

Some intervention from the Reserve Bank could also be a deterrent for speculators who might think that the rupee is a safe gambling bait since the RBI could be expected not to intervene. After all, Indian economy has strong fundamentals and the rupee should gain in the long run on the sheer strength of the size and resilience of Indian economy. Hammering it down on sentiment could present opportunities for making a fast buck on currency speculations.