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Wednesday, 24 December 2014 01:23
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Weak rupee alone won’t push up exports

While prime minister Narendra Modi is reportedly in favour of a stronger rupee—his Nani Palkhivala lecture last year publicly suggested this—several leading economists argue that the rupee is overvalued even after its recent fall, and it is this that needs to be fixed if India’s exports growth is to revive. Which brings us to the question of whether RBI should consciously target a weaker rupee or whether it should continue with its current policy of merely seeking to curb excessive volatility, within an overall game plan of building up an import cover of around 10 months over the next year or so—a recent report by BofA-ML argues it is the size of the import cover more than interest rates that really determines how stable the currency is over the medium-term. It is important to realise, despite all the evidence of whether the rupee is overvalued after adjusting for both inflation as well as productivity differentials with competitor countries, the rupee’s value alone does not determine export prowess. Between 2004 and 2008, the rupee  remained quite steady in REER terms—it appreciated in nominal terms—yet India’s exports grew at very high rates.

The rupee depreciated in both nominal and real terms over the last three years but exports growth has slowed dramatically, in keeping with global demand patterns and the growth crisis in the developed world. None of this is to suggest that the currency’s value does not play an important role in enhancing competitiveness, but manipulating the value of the rupee in itself isn’t going to help beyond a point—Chinese mercantilism wouldn’t have helped if China’s production facilities and infrastructure weren’t top class. Indeed, the flip-side of a weaker rupee is what this will do for India Inc’s balance sheets, more so when as RBI keeps pointing out, large parts of corporate India have not hedged their forex borrowings—after around $1 billion worth of redemptions each month till February 2015, the loan repayment needs to rise to around $3.5 billion in March and around $2.8 billion in April. Whether the recent turmoil in emerging market currencies will see large forex outflows from India remains to be seen—a lot depends on when the US raises interest rates, and by how much—the important thing is for RBI to keep building up its forex war chest as, once this dips, speculators get into action as the last collapse in the rupee showed. BofA-ML analysis shows that the rupee tends to stabilise once the central bank has over 8 months of import cover.



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