The Ministry of Commerce and Industry has proposed setting up of a “formal institutional mechanism” to determine the right value of the rupee for competitive advantage in export markets.
The proposition, part of a Cabinet note circulated by the ministry in July, is significant against the backdrop of the debate whether the Indian currency has been fairly valued. The Cabinet note refers to a study by the Indian Council for Research on International Economic Relations (ICRIER) which had concluded that, as of March 2015, the rupee may be 10 per cent overvalued against the US dollar. An overvalued rupee hits exports.
In this context, the Cabinet note, which proposes a series of domestic reforms in the services sector to enhance export earnings, has suggested that a formal mechanism be set up under the Department of Economic Affairs with representatives of the Department of Commerce and the Reserve Bank of India as members to arrive at the correct value of the rupee.
Exports posted a contraction for the 18th straight month in May amid weak global demand, rose in June and has contracted in July again. The ICRIER paper published in June 2015 had attributed sluggish external demand to the rupee’s prolonged overvaluation.
The paper concluded that the rupee’s trade-weighted real effective exchange rate or REER is 26 per cent overvalued as of March 31, 2015, compared to 2004-05. Under REER, the rupee’s strength is calculated based on a basket of six major currencies and also against 36 currencies, both based on weights assigned as per bilateral trade.
So, according to the paper, the Indian currency is starting to look overvalued against a basket of 36 currencies on a trade-weighted basis, suggesting that the rupee should ideally weaken in order to maintain export competitiveness. It said close attention needed to be paid by the government and the RBI on whether the rupee is fairly valued.
Apart from determining the correct worth of the Indian currency, the Cabinet note has also proposed a host of other reforms to increase export earnings. These include the establishment of a committee by NITI Aayog to address issues relating to standards in services and introduction of a Centrally sponsored scheme to mainstream teaching of foreign languages in schools and colleges to enhance market access opportunities for the workforce.