Column : India needs a weaker rupee
No wonder, then, that the clamour has been for RBI to let the rupee strengthen. In May and June, the markets wanted RBI to prevent rupee depreciation by aggressively selling dollars from its foreign exchange reserves. More recently, the markets do not want RBI to prevent the rupee from appreciating by purchasing dollars. The most common argument against currency appreciation is that it hurts exporters by making their products relatively more expensive. But research by Surjit Bhalla, an economist and FE columnist, and others suggests that a weaker currency in a sluggish global growth environment does little to stimulate exports. Even so, a weaker currency is what we need in the current environment—not necessarily to stimulate exports but to restore the competitiveness of the tradables sector.
Judgements about currency levels, as indeed about most other economic variables, need to be made on a real (or inflation-adjusted) basis. India’s relatively higher inflation rates compared to its trading partners (a problem that has only exacerbated in recent years) will mean that even if the nominal value of the rupee remains steady, it will appreciate in real terms. So, while the
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