Rajans effect on rupee a little bit of hype: Arvind Virmani

The Indian rupee closed in near 64 per dollar levels after hitting a nine-week low of 63.90 on Wednesday morning. The rupee is on track for its sixth consecutive loss and the renewed weakness has brought back memories of the recent slide that turned into a full blown crisis.

Fresh weakness in the currency has also raised question marks over the much publicised "Rajan rally," which refers to the sharp pullback in the rupee after Raghuram Rajan taking over as the Reserve Bank governor. Dr Rajan announced a number of measures the day he took over helping the rupee recover from a record low of 68.85 to around 61 by mid-October.

(Watch | Rajan effect on rupee 'a little bit of hype': Virmani)

In an interview with NDTV Profit, former chief economic advisor Arvind Virmani said, "I had said that what people were talking about the Raghuram Rajan effect really applied to the rupee above 65 because that was a overshooting and it had to be corrected and he [Rajan] did it very effectively. I think beyond that it was a little bit of hype."

What I had said was basically between 60 and 65 it would depend on fundamental factors - what was going to happen in the domestic economy and the international events," Dr Virmani said.

Traders have attributed the rupee's recent weakness to the return of state-run oil refiners in the open market. Banks, working on behalf of oil refiners, are sourcing part of their dollar needs in the open markets and not through the special window provided by the central bank in late August.

Rising concerns about a tapering of economic stimulus in the US as early as next month have also impacted sentiments around the rupee. A tapering or reduction in cheap liquidity will adversely impact fund flows into emerging markets like India, which run a large current account deficit.

Indian stock markets have also fallen sharply tracking the weakness in the currency. The BSE Sensex has shed around 1,000 points in the past six sessions.

Dr Virmani said until the US Federal Reserve lifts the uncertainly over the tapering of its $85 billion-a-month bond purchases, the cloud of uncertainty would remain on the markets.

"There is some uncertainty on the QE3 and it is going to continue to effect for at least three months till the new Fed chairperson takes over and makes clear what she is going to do," Dr Virmani added.

However, Dr Virmani expects the rupee to remain in the 60-65 range and appeared confident that India will not witness another crisis on the forex front.

"I don't think it will overshoot this time. The conventional policy, which is clear to everybody that the new RBI governor will follow, will mean that if inflationary expectations go up you can expect interest rate go up to signal an interest rate rise and the rupee will be kept in check," he said.