Economic Highlights

New Delhi, 26 September 2022

Rupee Fall

LET IT FOR FASTER GROWTH   

By Shivaji Sarkar 

The surging dollar and falling rupee are most difficult aspects of the economy but should be considered an opportunity rather than a crisis. India has to think and act differently. The Rupee hitting 81 to a dollar has given many a sleepless night, as stocks plunge 1021 points. And though  the Reserve Bank of India opens its purses to stabilise the rupee, it still slipped to 80.99 after a brief rise to 80.87.

Let India not subscribe to the theory that the rupee-dollar parity decides our economy. The Indian economy has strengths beyond the obvious in its still partially surviving mixed economy. Despite Finance Minister Nirmala Sitharaman repeatedly harping on the resilience of the Indian economy, her Ministry and the RBI remain panicky at the rupee fall. Let the oddity be considered a favuorable syndrome, for the fall can be more profitable.

Thursday, September 23, RBI operations made it clear that interventions add to forex kitty losses and gains are restricted to one paise literally. The government cannot apportion the blame, as it’s beyond it. The big question is: Isn’t there a way out? The government must realise it is not at all at fault as it cannot reverse the dollar trend, even if the economy sprints to make a new record. In the present global scenario, the dollar would appreciate and India has to create the strength out of the falling rupee. It must get rid of the notion that the rupee has to maintain a high level of parity.

Rather, lower the rupee is better for the economy. Trying to stabilise it means, as is being said by Reuters, the RBI preparing to lose $100 billion and achieving precious little. It must not do so and should allow the rupee to sink. The Indian economy knows how to swim and do better. The domestic economy can thrive with the dollars saved, which could be used instead to bolster the economy than reinforcing the US economy.

Every fall of a currency helps it. Since last January, the US has gained by its maneuverings to snatch the best of the world economy for itself. India itself has deployed $82.8 billion from its reserves. In September alone, it sold $10 billion with RBI’s intervention. The forex reserves have come down to $550.8 billion compared with an all-time high of $642.4 billion last year.

The intervention is not helping India as dollar rates are decided by international factors and American manipulations. In reality, each dollar intervention subsidises the US economy and not the domestic. Simply out, the US gains at India’s cost. Let the rupee fall and create new avenues.

When the fall of the rupee is orderly, normally the RBI allows the rupee to find its value. But when the fall is due to speculative activity, the RBI intervenes. The RBI also acts when the rupee crosses its comfort level, which for many months had been 80. Following the US Fed meeting raising rates by 75 basis point, the fall in value of the rupee is unprecedented. The recent RBI intervention could not control this abnormal fall.

The US was among the first countries to advocate movement away from gold standard in 1971, when President Richard Nixon closed the gold window then, in order to address the country's inflation problem and to discourage foreign governments from redeeming more and more dollars for gold.

The US built military might and hegemony across the world. Plus, it controlled the oil trade hedging it to dollars. Further, the consumer economy it created, forced most of the world to look at it and export to the US. Besides, most of the world resorted to dollar denominated trading as they all were receiving dollars for goods exported to the USA. This accorded the dollar a reserve status. And almost all Central banks would park their surplus money with the US treasury. So today, even though the US has a very high debt compared to its GDP, the dollars flowing in strengthen it.

China had been trying to challenge this status. It kept its currency artificially low. Russia and China are also trying to break the dollar stranglehold on oil trade post the war on Ukraine. The Japanese currency is also undervalued but its economy thrives.

In case the rupee continues to fall with many global currencies, including Euro and Pound sterling the advantages would be for products such as metal, pharmaceuticals, IT, host of cosmetics and products that are not import dependent. The products for the domestic market could even, in the course of time, get insulated from dollar-linked inflation. More so, as crude prices have come down to around $80 a barrel. If the taxes on petrol and gas are cut, the advantages would be more than gains in GST collections.

A depreciating rupee would make Indian exports more competitive though imports of essentials may be expensive. An exporter is to earn more in rupee terms. The advantage could be that larger forex would be earned and the outgo would be less. The kitty, not lost on stabilisation exercises, could be used to help incentivise and indigenise domestic products.

There is a myth that foreign investors normally withdraw as the rupee falls. This is partially true of short-term foreign portfolio stock exchange investors, who come for quick profits. But it makes little difference to the long-term investors. They come with a different mindset and had been investing in many industries even before 1991.

The strategy could also be a great booster for checking uncertain technology and EV imports that is bound to raise India’s dependence on import of lithium-ion battery technology and coal, causing enormous environmental hazard. Yes, India can put off the emission norms to make its industry more competitive and remove checks on cheaper diesel use.

Imports might cost a bit more. But if the trend in crude prices continues, major outgo would be checked. Industries that import components for their products could see a surge in cost. But chemicals and automobile prices may have discomfort with some rise in their costs. So higher export volumes spur economic activity and pricey imports lead consumers to opt for local alternatives. The EU has raised duty on Indian textile imports. The rupee depreciation may partially set off the adverse impact on Indian exports.

The RBI is bound to increase interest rates to keep investment flow on with checking the rising inflation and boost the growth path. Overall, a falling rupee is not a liability for India, as managed properly it would maintain domestic growth and has not much to lose externally. ---INFA

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