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Hit by the rupee PDF Print E-mail
Thursday, 22 May 2014 08:53
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Indian Express edit

With FII pouring in, rupee will strengthen. That could hurt both the trade balance and industry

With close to $12 billion of FII money coming into the country since January, the rupee has appreciated by 6 per cent, and the prospects of further appreciation cannot be ruled out. Most foreign brokerages are re-rating the stock markets already, and some have started upping their estimates of 2014-15 and 2015-16 GDP growth rates as well. While the RBI is buying dollars to keep the rupee from appreciating, it appears to be fighting a losing battle. More importantly, it is not clear whether the new government is in favour of a weak rupee. To the extent that a stronger rupee means lower local oil prices, the political class may favour it. The flip side is, if passed on to consumers, higher oil prices result in lower consumption levels — and if the passing on is done gradually, as with diesel, consumer anger remains muted.

Going by what some of the BJP’s favourite economists like Arvind Panagariya have said, it might well be in favour of a weak rupee. Panagariya had been sharply critical of Duvvuri Subbarao when he was RBI governor for not buying enough dollars when he had the chance — buying dollars would have increased forex reserves and also kept the rupee weak. There is no robust relationship between the value of a currency and exports — indeed, a weak rupee has been accompanied by falling exports at times. This is because when global demand is poor, as it was till some time ago, a cheaper currency is of no help. Also, lower global crude prices distort the picture. Oil exports comprise around a fifth of India’s exports — so, even while non-oil exports are rising, lower crude prices give the impression that India’s exports are stagnating.

What is a lot more robust than just the exports response, however, is the impact on the non-oil, non-gold trade balance. As the rupee weakens, imports become more expensive and importers start looking for local substitutes. The world over, the first response to a currency movement is seen through the balance of trade. In India’s case too, the non-oil, non-gold trade balance started improving over the past year as the rupee started weakening. With the rupee now getting stronger, unless the RBI starts buying dollars aggressively and shores up its reserves, this is likely to get affected. Since the more immediate import-substitution and the longer-term export fillip also result in greater industrial production, there is a danger of the economy getting hit by a strong rupee.

 

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