#dnaEdit: Forget the exchange rate

Too much of noise is being made over the rupee’s falling exchange rate. Media reports indicate that the Prime Minister wants a strong rupee and attempts are afoot to achieve that. But the fact is that when the economy was going through some turmoil in recent weeks, the rupee did manage to stand its ground well. Therefore, the ongoing concern over its exchange rate would surely appear to be a trifle exaggerated. 

Consider the recent global developments at the macro-economic level: oil prices skidding, Russia’s rouble sinking, European economies facing deflation, Japan’s yen sliding and its economy contending with prospects of further shrinkage. New data showed China’s growth slowing down as well. Above all, the US dollar was appreciating against all other currencies reflecting the strong growth performance of its economy.

Against this backdrop of general fluidity, the rupee had conceded very little ground. It was 61.95 rupees to the US dollar on the 10th. On Friday (19th) it was 63.06 rupees to a dollar — a loss of about one rupee. Compared to this, the Russian rouble had lost something like 41% against the dollar. 

If at all, the Indian rupee should now firm up. This is because India’s largest import item is costing less and this is good news on several counts. The slashing of a large chunk of oil bills would lower oil price and take the pressure off the current account deficit. This would also help in bringing inflation down. Pegged at just around 2%, wholesale inflation is already low. Retail inflation is still high, but the next round of figures should register some impact of the falling food and energy prices. It can reasonably be argued that food prices should remain soft till about April. This window of lower inflation should be the time to attempt a review of some basic policy parameters.

Maybe, the Reserve Bank of India (RBI) should take a look at its monetary policy stance.

For decades, China had kept the exchange rate of its currency artificially low in order to secure competitive advantage. With its export-led growth model, China had never bothered about its real costs of producing goods. The government kept interest rates low, charged industry hardly any price for land, offered subsidies and went for broke to step up exports. China achieved that objective, having huge manufacturing factories where average costs were low. Customarily, the exchange rate should have appreciated with the exports increasing and trade account showing massive surplus. But China muzzled any appreciation by mopping up inflows and in the end built its over $4 trillion forex reserve. 

However, China does now realise the limitations of this policy and, therefore, allows room for some market play. It is allowing the renminbi exchange rate to rise but only within certain bands. Given the fundamentals, China’s currency should have appreciated much more. But then, its exports, already under pressure following the Great Recession in the advanced economies, would have faced even more competition. China is seeking desperately to alter the structure of its economy by shifting the focus on to consumption within the country as opposed to exports to markets outside. 

Rather than seeking to shore up the exchange rate, the task at hand is to push the domestic economy on a faster growth trajectory. It is irrational to view the exchange rate of a country’s currency with national pride. It is just another price. A stronger economy should get reflected in the exchange rate in the long run. Till then, maintain a cautious stance in the overall interests of economic stability.