The rupee has been the worst performing Asian currency so far this year. Analysts predict it is likely to weaken further hereon.
Reserve Bank of India Governor Raghuram Rajan on Thursday said that a move towards an inflation target of 4% will help contain the currency market volatility. While, Finance Minister Arun Jaitley, while speaking at a CII event, said he didn't see any "serious challenges" to the rupee.
"Our aim in the macro stabilisation is to make the exchange rate less and less an issue that investors have to worry about," Rajan said.
The Indian rupee has been the worst-performing currency in Asia thus far in 2016. The rupee, which closed at 66.66 to a dollar on Wednesday, has fallen 0.6% in 2016 after rallying 2.8% in March. It had, in February depreciated to the brink of an all-time low of 68.845 to a dollar seen in August 2013.
On Thursday, the rupee gained some ground and was up 14 paise to 66.52 on fresh selling of the dollar. However, fresh foreign fund outflows and a lower opening in the domestic equity market restricted rupee's gain.
"If we move towards our inflation target of around 4%, then the years of the past where you had extreme volatility in rupee because rupee inflation in India was much higher than the world, will become a thing of the past."
Rajan said a long-term view would show that "depreciation in the rupee essentially matches inflation differentials and therefore anybody who invests at rupee rates gets appropriate returns to match the kind of depreciation risk that they have taken".
"Put differently, if foreign investors want to lend to India in a long run for infra projects, the value of the rupee at the end of the project is probably a second order concern, should be a second order concern," he added.
Jaitley, on the other hand, said that the rupee doesn't face any "serious challenge" of depreciation and will find its own level after initial bouts of volatility.
"I think India's currency is finding its own level. I don't see a very serious challenge," he said.
Barclays has forecast that the rupee may drop to an unprecedented 69 a dollar by June 30. It will further weaken to 70.50 by September 30 and end the year at 71.50 a dollar. Morgan Stanley has forecast it to be 73 to a dollar by the end of 2016.
"The rupee is impacted by global events but eventually recovers, he said. "Of course, if some significant movements in currencies globally take place, like in the dollar rates, there is some movement. But I think eventually after an initial impact our currency has shown, at least twice in last three years, a tendency to recover," Jaitley said.
Jaitley said that despite global currencies losing ground, the rupee was holding out for the past one and a half year, till August last year, when China devalued its currency, "I think until that moment we have almost kept pace and parity with the US dollar. The dollar had strengthened.
"Subsequent to that, we lost significant amount and then recovered a little bit. Over other currencies in the world, we were still strong," he added.
(With inputs from agencies)
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 "Raghuram Rajan, Arun Jaitley")
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