Since taking charge, Prime Minister Narendra Modi is said to have met many senior bureaucrats and experts seeking inputs on his election promise of delivering a strong currency. His wish for a strong rupee is said to have even delayed the appointment of a senior economist who is known to be a proponent of a China-type export-led growth model that entailed keeping the renminbi artificially low.
These meetings assume significance with the rupee hitting a 13-month low — it inched up to 63.11 today — and senior officials expressing concern, some of them even suggesting a particular band for the rupee. Commerce Secretary Rajeev Kher had on Tuesday said in Mumbai that a rupee below 63 left him a “little concerned” and that exporters and his industry friends had told him that 60-62 was a good level.
Several persons in the government and outside whom The Indian Express spoke to — including two former RBI Governors — interpreted the Prime Minister’s view on the rupee as his intent to reflect a “stronger image” of the country to the world.
“Somehow, a stronger rupee is linked to national pride,” said a former RBI Governor who spoke on the condition that he not be named. But he quickly added: “The belief that a strong rupee reflects a strong economy cannot be taken too far.”
A top bureaucrat said that the PM’s desire for a strong rupee is best understood in political rather than economic terms. This bureaucrat, with whom Modi broached the topic, explained to him that the exchange rate is a function of many economic variables including inflation and interest rate and that the Reserve Bank of India (RBI) intervenes only when there is sharp volatility in the exchange rate.
One bureaucrat, to whom this idea was presented, is said to have told the Prime Minister quite politely that he was best advised to let the central bank worry about the level of the rupee.
Another former RBI Governor, who has not met the Prime Minister, said the terminology — a strong rupee — itself is misleading. A stronger currency was not necessarily a bad idea if the macro-economic environment was conducive to the rupee’s appreciation, he said, but sought to distinguish between a “strong” rupee and a “stronger” rupee. A strong or over-valued currency would adversely impact exports, he said.
Market analysts point out that the rupee may have depreciated vis-a-vis the US dollar but has appreciated against almost all other currencies.
“The RBI’s dilemma,” said Credit Suisse Research Analyst Neelkanth Mishra, “was whether REER (real effective exchange rate) or US dollar should be the anchor for the rupee.” The rupee’s REER value or its weighted average relative to a basket of 36 currencies, stands at about 110, indicating it is over-valued by 10 per cent. It’s said to be fairly valued when close to 100.
While RBI takes a holistic view of the exchange rate, a depreciation against the US dollar attracts much attention. “In economic terms, it’s the REER that matters. I want a rupee that is strong in real terms. For this, inflation must be low, the cost of production must come down, exports should rise resulting in a better trade deficit, complexities of administration should be minimal, subsidies should be concentrated around the needy, and FDI capital inflows must increase. Who wouldn’t want a strong rupee then?” said a former RBI governor.
Sajjid Chinoy, Chief India Economist, JP Morgan, said the rupee’s depreciation over the last week should not lead to any panic. “The rupee has weakened in tandem with other emerging market currencies over the last week. Until November, the real exchange rate had appreciated almost 9 per cent and if the rupee had not weakened in tandem with other currencies, it would have hit India’s tradable sector.”
According to him, capital flows will become more discriminating and India’s macro fundamentals will appear attractive once the dust settles after the global shock.
Between June 2009 and September 2013, the rupee had plunged by a phenomenal 40 per cent giving Modi all the ammunition he could ask for to attack the UPA. On October 19 last year, delivering the Nani Palkhivala lecture in Chennai, Modi had said, “Today our rupee is in the ICU; I don’t know why Tamil people sent this person (P Chidambaram) to Delhi.” Chidambaram had later countered Modi stating that the rupee fell in May 1999 when NDA had formed the government and also in May 2004 when it demitted office.
In the nine months — between September 2013 (Raghuram Rajan took charge as RBI Governor on September 4 and Modi was named BJP’s prime ministerial candidate on September 14) and May 26, 2014, when Modi took charge as Prime Minister — the rupee gained dramatically by over 10 per cent against the US dollar to touch 60.16.
The NDA’s belief that a strong rupee reflected a strong government dates back to the late 1990s. Former RBI governor Bimal Jalan was under pressure from the BJP-led NDA government to stem the rupee’s fall during the East Asian crisis.
Barely months into taking charge as RBI Governor on November 22, 1997, the rupee dropped significantly and there were demands from the political establishment to intervene. Even then, Jalan did not try and defend a particular level of the rupee.
While RBI governors would not publicly state if they intervened in the market, one former Governor said he had to do it all the time. “Intervention had more to do with managing the sentiments. We did sell US dollars to shore up the rupee, but never targeted a particular level,” he said, adding, this would have been a dangerous game. “The level of the rupee is a reflection on our current account deficit and capital flows. If market players know the RBI is targeting a particular level, they will have a great time since they can operate without any exchange risk,” the former Governor said.
Sources in the Finance Ministry said a strong rupee was indeed the Prime Minister’s idea of a strong economy but denied that he has suggested RBI intervention to achieve this end. “If inflation is what it is today, and we are able to push exports and also make India an attractive investment destination, the rupee will appreciate,” a finance ministry official said. What matters more is a realistic exchange rate policy keeping in mind the economic environment, while the country strives hard to better its fundamentals by raising its investment and savings rates, the official added.
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