Column : Is depreciation different from QE?

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Madan Sabnavis: Feb 20 2013, 01:08 IST

G20 meets are usually considered to be jamborees where there is a lot of discussion on how the world economy should behave and how countries should foster growth through consensus. At times, it would not be more than a repetition of the earlier summits. But the recent one had a specific purpose on an aspect that, prima facie, has not really dominated the economic space, but has covertly been playing in the background, i.e. exchange rates. There is growing suspicion that some export-oriented countries may be trying to get out of trouble by depreciating their currencies consciously.

The world economy has been in a downward spiral for quite some time now. The financial crisis had its impact for two years and it was felt that the global economy bounced back as fast as it had crashed. But the sovereign debt crisis has been associated with a deeper crisis involving the credibility of countries, which, in turn, has affected the policies pursued by them.

While trade is not so much as a driver for the Indian economy, though the economy has gained when exports grew by over 20% per annum, being a domestic economy largely, the same does not hold for countries like the US, Germany, Japan, China, etc. The dependence on exports has meant that the exchange rate has a critical role to play in the growth process. One way out is to let the currency fall, which means that exports become cheaper in international markets and this helps domestic industry to

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