Seeing the Silver-linings

India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy. 

And the rupee goes past 66 per dollar! An all-time low! Its swinging motion in the range of 61-66 per dollar has become a cause of concern for Finance Ministry and Reserve Bank of India. Though their panic-stricken remedies adopted to cure rupee’s free-fall do suggest that economy might go down into dumps if currency doesn’t stabilize but considering that India’s export business is bleak and currency depreciation is a tried and tested formula to boost it, rupee’s fall CAN be translated into export-growth, CAN turn out to be a positive for Indian economy.

Scrambling to tame burgeoning CAD and thus halt rupee’s slide, Chidambaram hiked import duty on gold, silver and platinum to 10% and also hinted to raise duties on non-essential luxury items such as air-conditioners, refrigerators and expensive watches. It has also asked state-run financial institutions to raise funds abroad through quasi-sovereign bonds, and liberalized rules on overseas commercial borrowing so that more dollars can be brought in India. Not only FM, but monetary policy supremo RBI is also up with its efforts through its liquidity tightening measures. It restricted banks’ easy access to money so that bank-financing for speculators who create pseudo dollar-demand in currency market, can be curbed. Apart from these, RBI also put drastic capital controls on Indian residents and companies to stem the dollar outflow. Now only $75000 can be remitted by resident-individuals which is a steep fall from earlier limit of $200,000. Also, no Indian company can invest more than 100% of its net worth in foreign countries which could earlier invest 400% of their net worth.

Unfortunately nothing translated into rupee’s stability and it went beyond 66 per dollar. What was supposed to work for rupee didn’t help it, rather backfired hitting the economy with collateral damage. On one hand increased lending rates due to liquidity tightening is eating on the already dilapidated growth, on the other recent capital and import controls have fuelled the panic arose out of rupee’s fall. Not only foreign but even Indian investors are now losing faith from Indian economy.

Now that much has been tried to stem rupee, it is time that it is left to take its own course. Rupee’s fall is just a phase of wheeling vicious cycle which by itself would come down to a stable level. Indian credit rating agency CRISIL has in fact predicted that rupee will stabilize at rs. 60/dollar by March 14.

It is time RBI and Govt. accept that they are short of arsenal to protect rupee. They must instead look for ways to make the best use of rupee depreciation. Japan and South Korea in sixties and China in nineties had deliberately weakened their currency in planned manner to boost export, which actually paid them well. In fact, rupee’s fall has begun making positive impact on India’s export-business.  Exports rose by 11.64% in July. Also, rupee’s value against dollar is at a level which gives it competitive advantage in exports as compared to currencies of other countries including China. The most important point to consider is that export-boom, if it at all it happens, can eventually ease pressure on rupee through an increased flow of dollars.

Hence it is time that cheaper rupee is converted into export-drive. It would not only perk up India’s internal sustenance but also help restore investor-confidence in Indian economy.