Indian rupee that rallied against the US dollar in the opening trade weakened on Thursday after media reports said that Commerce Ministry is planning to devalue the local currency to boost exports in the wake of that growth worries in India. However, Union Commerce Minister Nirmala Sitharaman was quick to deny the reports said that she has no talks on the same with any journalist. Exports in India have been contracting over the past 22 months. Indian rupee was trading 14 paise down at 67.04 at 12.55 pm against the US dollar. It had closed at 66.89 level on Wednesday
Dhananjay Sinha, head, institutional research, economist and strategist, Emkay Global Financial Services Ltd decodes on what rupee devaluation means. He has maintained 68-70-levels of rupee against dollar.
1. Rupee depreciation is seen as a means to resuscitate growth as the local currency is overvalued on REER basis considerably.
2. India has prevented sharp decline in rupee following fears of capital retrenchment. India mobilised $26bn FCNRB deposits in 2013 and further enhanced its forex reserves reserves. While this ensured stability in exchange rate and financial markets, it has ended up harming India’s competitiveness. Given that Indian rupee is a float currency, there is very little instrument at the disposal of the RBI to effect automatic INR depreciation; at best RBI can allow greater flexibility when USD is appreciation, say in response to strengthening of dollar in response to Fed rate normalisation.
3. Exports are also not growing following structural issues like de-globalisation of world trade in which currency has no role to play. Also it would require cyclical support of sustained rise in commodity prices for exports to start growing again. The market expert believes, exports can see some limping back of growth on the back of recent recovery in commodity prices, initiation of fiscal stimulus by several countries and fed rate normalisation causing EM currency (& also INR) depreciation. These factors might be able to partially negate the adverse impact of rising de-globalisation.
4. If rupee is devalued, it will be negative for rate sensitive stocks like bank, especially for PSU banks.