MUMBAI, NOV 9: The Reserve Bank of India (RBI) seems to have changed its strategy in allowing the rupee to fall against the dollar. The central bank is no longer aggressive in propping up the rupee, but has kept away from the foreign exchange market, allowing the rupee to seek its own ``correct'' value. This has puzzled market pundits. The RBI has allowed the value of the rupee to fall by around 16 paise in the last three days to Rs 36.53 against the dollar. Forex dealers never expected the RBI (the central bank uses its forex reserves to maintain the rupee value) to allow the rupee to sink below the Rs 36.50 level.

But what has lent credence to the belief that the rupee would witness a sharp decline was the statement by outgoing RBI Governor C Rangarajan that the central bank would intervene in the market only when the rupee shows excessive volatile movements.

This is a change in the approach of the central bank towards controlling the rupee's movements. Especially so, when the RBI pumped in around $ 1 billion from its forex reserves -- from a kitty of $ 30 billion including foreign currency assets, special drawing rights of IMF and gold -- in August-September to prop up the rupee. That was after it fell from Rs 35.60 on August 28 to Rs 36.60 by September 9.

Now, the RBI, which bought and sold dollars to maintain the rupee value in the past, is mostly keeping away.

Since the rupee has now fallen below the Rs 36.50 level once again, it's only a matter of time when the rupee touches the Rs 37 barrier against the dollar. Forex experts like K N Dey of Mecklai & Mecklai feels it will happen by the end of the year. ``The rupee should reach its correct value on its own. It will go down further,'' Dey said. However, this view was not subscribed to by many corporates which had gone for overseas borrowings. The continuous fall in the rupee and other South-east Asian currencies have proved that overseas borrowing can turn out to be expensive and dangerous.

The nearly 40 per cent fall in South-east Asian currencies is precisely the reason why exporters -- who were worried about their goods becoming expensive than their counterparts in South-east Asia -- also prefer a sustained depreciation of the rupee. In fact, the exporter lobby wanted a steep devaluation of the rupee in line with the fall in South-east Asian currencies like baht of Thailand and ringgit of Malaysia. The rupee was rock-steady (thanks to heavy dollar inflows) for over a year till the statements of RBI deputy governor and Prime Minister ``talked down'' the rupee in August.

These factors might have prompted Rangarajan to make a statement last week that India will be moving towards a policy of ``competitive devaluation''.

Apart from the South-east Asian problem, what might have contributed to the the stand of non-intervention in the forex market is the negative growth of many industry segments and stagnation in exports. As many as 36 segments had shown negative growth in the first six months of the current year. With the export growth not taking off the way the government wanted, depreciation of the currency is the only way out to keep the growth momentum. It is quite remarkable that the rupee was more or less insulated from the turbulence that rocked South-east Asian countries, thanks to the stringent regulatory control by the RBI. Still the world stock crash and its impact on the Indian market is a stark warning to the currency market.

Besides, opinion is divided about the inflow of capital following the world stock crash. One school of thought has it that inflows will come down as foreign investors will put on hold fresh investments till the markets stabilise. The withdrawal of GAIL's GDR issue will result in the tapering down of expected dollar inflows. If MTNL which is still going ahead with the issue meets the same fate, dollar supply will dry up and the rupee will weaken further. he second view is that foreign investors will prefer markets like India which showed less volatility.

All said and done, the depreciation lobby -- which wants the rupee to seek its own level -- seems to be having upper hand now. The RBI and the government also seem to have finally arrived at that conclusion that when currencies everywhere is falling, India should not be an exception.