Tuesday, Nov 29, 2022

Let it slide

RBI must not intervene to break the rupee’s fall. A weak currency will help exports

reserve bank of india surplus to government, shaktikanta das rbi governor, urjit patel resign, jalan committee govt surplus, india economy slowdown, A weak currency will push up the import bill.

On Tuesday, the rupee fell 1.36 per cent against the dollar, ending the day at a nearly 10-month low of 72.39. On Wednesday, it recovered marginally, closing at 72.12 against the dollar. Day-to-day fluctuations notwithstanding, the rupee has weakened considerably in the recent past, declining by around 4.7 per cent since July 31.

Though the fall in the currency is not unique to India — currencies of most emerging markets have weakened after the Chinese authorities allowed the yuan to fall below the psychological mark of 7 per dollar — the rupee has weakened more than the others. This decline in the currency is likely to spur calls for the Reserve Bank of India (RBI) to step in to stem the decline.

A weak currency will push up the import bill. It will also be inflationary. But the RBI should resist from intervening in the currency market. It should allow the currency to slide. A weak currency has its advantages in that it makes exports more competitive. Moreover, the rupee’s decline over the past month or so is driven by global as well as domestic factors. Globally, the greenback has strengthened. On Tuesday, the dollar index hit a two-year high, rising to 99.37, its highest level since May 2017. Domestically, foreign investors have continued to pull out money, even though the government has reversed its decision on the surcharge levied on foreign investors.

A slowing economy will only exacerbate such outflows but there is no reason to panic. The evidence suggests that the rupee is overvalued. According to data from the RBI, the 36-currency export-based real effective exchange rate (REER) stood at 119.54 in July — indicating significant overvaluation. This overvaluation has affected the competitiveness of India’s merchandise exports which have remained almost stagnant in the recent past, rising marginally to $330 billion in 2018-19 from $310 billion in 2014-15. In comparison, over the same period, exports of countries like Vietnam and Bangladesh have surged.

Subscriber Only Stories
UPSC Key- November 29, 2022: Why you should read ‘Executive Vs Judiciary’...Premium
Delhi Confidential: Ahead of Gujarat polls, BJP worries about NOTA votesPremium
Agrarian Punjab diesel-driven; Delhi opts for cleaner optionsPremium
The shadow of 1979: Iran and Saudi Arabia are fighting Islamism; Pakistan...Premium

With China allowing its currency to slide, other countries, which compete with China in the export market are likely to follow suit. Competitive devaluation is a possibility. US President Donald Trump also wants a weak dollar. In such a situation, the RBI should let the currency slide.

With private consumption collapsing, investment activity remaining subdued, and the capacity of the government to stimulate the economy by increasing its spending being limited, a weak currency, by improving the competitiveness of exports, could provide much-needed fillip to growth. While the RBI’s stated policy is that it does not target any particular level, the continued overvaluation of the rupee needs to be attended to. Alongside, the government must address the structural issues that bring down the competitiveness of India’s exports.

First published on: 05-09-2019 at 03:45:02 am
Next Story

India’s abrogation of Article 370 is an opportunity for Pak to redefine its nationalism

Latest Comment
Post Comment
Read Comments