The rupee has been behaving differently from most of the important world currencies. A medium-term review indicates that the dollar has strengthened against most international currencies in the post-global-financial-crisis period. In 2013, the euro ended December at a value of 1.3779 dollars per Euro, but currently fetches 1.12 dollars. In other words, euro has lost about 20% value. The British pound was at 1.6562 per pound in 2013 but currently fetches 1.27 dollars, indicating value depletion at a rate faster than the euro. Closer home, the Chinese RMB was 6.0539 for a dollar in 2013, but has since fallen by almost 10%—1 RMB now fetches 15 cents. Similar behaviour is displayed by the BRICS and ASEAN currencies.
The Indian rupee has, however, appreciated against the dollar, and by implication, against most other currencies as well. It had touched a low of almost 69 rupees to the dollar during 2013, but had stabilised thereafter at around 67. In the recent months, it has gained value as it currently trades around 64 to the dollar. This appreciation has been occurring despite consistent deficits in our trade balances because of unidirectional capital inflows.
We are not going into the standard debate about whether this appreciation is good or bad for the economy. Undoubtedly, Indian exporters are hurting as rupee appreciation reduces their profitability—at times, significantly. Indian exports are mostly of low-/mid-tech items and have low profitability margins, unlike the technology-rich exports of richer countries or even China. A ‘high’ rupee deters investment in our manufacturing sector and is concurrently negative for our farmers. However, the importers (and we import more than we export) benefit and our markets, as also roadside vendors, are flushed with various importables, ranging from our cell phones and laptops, fruit on our table to cosmetics et al. Most capital goods are imported as also are many intermediates. There is nothing new in this. We have always been importers of capital, products and technology, but an important exporter of skills via manpower. A strong rupee is thus better liked by the consumers than a weaker one. It also makes foreign travel cheaper than a weaker currency. So, there are two sides to the story and both points are widely propagated. The main question is thus better examined if one asks whether the rupee is getting ‘fairly’ valued.
Here, we are not getting into the ‘nominal’ versus the ‘real exchange rate’ or the REER debate. It is rather narrowly technical and you have two equally plausible but opposing views on the subject, going by the RBI and Economic Survey analytics. Thus, again, the picture changes depending on which side of the fence looks out. Instead, we raise the question of ‘valuation fairness’ from a different standpoint—that of giving a level playing field to the two-opposing set of views. A form of equality of opportunity, if you will.
The foreign exchange market has two parts: current account and capital account. Till 1991, we had relatively closed exchange markets and, consequently, witnessed not only low growth rates but all the ills of smuggling/black-markets. The 1991 liberalisation was well modulated, current accounts, including gold, were liberalised first. This resulted in the economic boom we now celebrate. Both imports and exports surged. A lot of fresh investment in manufacturing capabilities also got created. There was therefore all-round growth. These successes facilitated graduated capital account openness. FDI rules for inward investment were liberalised, but, concurrently, Indian corporates were permitted to expand overseas. Investments by outside players in our debt and capital markets were permitted, but, concurrently, Indian individuals were permitted to remit money overseas via the Liberalised Remittance Scheme (albeit with a ceiling of $200,000 per year). Alongside, maybe with the intent of wanting to retain savings within India, a modest beginning of permitting resident to maintain ‘resident foreign currency’ accounts in their local banks was also started in 2002.There was, thus, an attempt to permit this equality of opportunity to the two possible opinions on the value of the rupee.
The liberalisation of gold imports had two main consequences: there was a boom in our gems-and-jewellery sector. This sector became the second-largest exporting sector. However, as the process of opening/maintaining RFC accounts was kept complicated with various rigidities and user unfriendliness, and as investment growth potential overseas fell post the 2008 global financial crisis, individuals wanting inflation protection or having a contrary view on rupee valuation, started mainly buying gold. So, gold imports shot up. Current account imbalances started getting enhanced in response to capital inflows. This additionally facilitated large dealings for our ‘black market’ operators, apart from adding to our already large import bill. The attempt to delink ‘inflation protection’ from gold purchases via issuance of ‘inflation indexed’ and ‘gold linked’ bonds failed for reasons like the failure of the RFC scheme, i.e., user unfriendliness.
The recent drive against black money by placing restrictions on gold holdings has, thus, admittedly curbed black money operators, but has also created a piquant condition of preventing adapting of contrapositions on the rupee via gold purchases, even when an additional instrument permitting foreign individuals to take positions on the rupee from the safety of their own markets has been offered via the newly and aggressively positioned masala bonds( rupee denominated bonds issued by the best Indian corporates/PSUs in overseas bond markets). This raises afresh the question of whether the imbalances in the number of players is artificially inflating rupee values.
A simple solution to recreate market balance without relaxing curbs on tax avoiders would be to seek a capital account solution to the capital inflow problem. Why not re-visit, simplify and popularise the existing RFC scheme within the existing LRS ceilings? Aadhaar and PAN card linkages would prevent misuse. It would also provide access to low-cost foreign currency funds for our domestic banks, reducing their dependence on the overseas bond markets/rating agencies. It can be a win-win solution.
The author, TCA Ranganathan is Former CMD, Export Import Bank of India