A question raised today, now that the rupee has crossed the 69 level, is as to where can it go? The answer is that no one really knows, as there have been too many things happening that go beyond the realm of fundamentals. Normally when the rupee falls at a rapid pace, it is conjectured that it would continue to fall and new psychological levels are accordingly fixed.

Touching 69 invariably has the market talking of 70. This is because we tend to make what in economics is called ‘adaptive expectations’. But as has been seen in the past, the Reserve Bank of India (RBI) can make a big difference in terms of intervening in the market, which then changes things quite appreciably and often there can be a reversal in direction.

Why has the rupee fallen? There are two standard sets of reasons for the same with each one reinforcing the other. These are witnessed even today. The market sentiment actually drives the rupee on a daily basis. Here the causes have strengthened this week.

First, the trade war between the US and China seems to be escalating in terms of decibels though the exact tariffs and restrictive procedures are less severe. But this is good to spook the market. Second, the recent decision of the OPEC to increase output has been interpreted as being a damp squib as the amount is too low to make a difference. The market now realises that what has been proposed touches the periphery and not the core. Therefore, Brent is back to the happy hunting days of $77-78 a barrel.

Third, US sanctions on Iran are escalating. As India imports oil from Iran, the panic is palpable even though closure of this market will bring about substitution with other countr ...