1. P Chidambaram: Who wants rupee at 40 to the dollar?

P Chidambaram: Who wants rupee at 40 to the dollar?

Not Prime Minister Narendra Modi. Not Ms Sushma Swaraj (who famously tweeted in August 2013, “The rupee has lost its value.

By: | Updated: April 5, 2015 9:29 AM
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Who wants the rupee to trade at Rs 40 to one US dollar?, asks P Chidambaram.

Who wants the rupee to trade at Rs 40 to one US dollar?

Not Prime Minister Narendra Modi. Not Ms Sushma Swaraj (who famously tweeted in August 2013, “The rupee has lost its value. The Prime Minister has lost his grace”). At least not any more, and it would not be polite to remind them of their promise during the election campaign last year. We should be happy that that was a promise the government has not kept.

Mr Arun Jaitley, the finance minister, was a model of discretion when he said a few days ago that, “Government would like the rupee to reflect its real value.” He is aware that the rupee has appreciated slightly more than 20% against the euro in the fiscal year 2014-15. Against six currencies, the trade weighted real effective exchange rate (REER) has risen from 109.58 in February 2014 to 124.34 in February 2015. Change in the REER measures the change in the relative value of the rupee vis-à-vis the chosen basket of currencies. Rarely does any currency trade at its real value on every day of the year. It is normal for a currency to witness bouts of appreciation or depreciation but, over a long period of time, a currency must reflect its real value.

Rupee value will change

Several factors affect the value of the rupee. The obvious factor is the rate of inflation relative to the rates of inflation in the countries of our key trading partners. The second factor is inflows and outflows that will strengthen or weaken the currency. The third factor is productivity change in India. Monetary policies of the major developed countries will also impact the currency of a developing country like India: recall the “taper tantrum” (to quote the IMF’s managing director) of the US Federal Reserve in May 2013.

2014 was an unusual year. Developed economies were crawling with low inflation and low growth, oil prices had collapsed, and commodity prices had declined sharply. India’s high interest rates attracted large quantities of foreign funds. The current account deficit remained under control and fiscal consolidation was on track. The value of the rupee was reasonably stable, especially against the dollar, but then came new problems.

The rupee appreciated against other currencies and exports were sharply affected. In February 2015, exports fell by 15% year-on-year. This was the third successive month of decline. There was negative growth, year-on-year, in the export of manufactured goods including leather and leather products, engineering goods and electronic goods.

High interest rates bring their own problems. Export competitiveness of manufacturers and exporters is eroded. Large inflows of foreign funds, especially into the capital markets, force the Reserve Bank of India to buy foreign currencies (especially dollars) to arrest the appreciation of the rupee. If managing the exchange rate takes precedence, managing inflation takes a knock.

The gathering clouds

There are clouds on the horizon. The first is, what will the US Federal Reserve do? Will it hike interest rates?

The second is declining exports. Exports earnings are a stable source of foreign exchange. Rising exports also boost manufacturing, increase demand for a variety of services, and create jobs. I am afraid we may have missed the export target for 2014-15 and only barely equalled the export value of goods in 2013-14 ($312 billion). Key export sectors such as textiles, gems and jewellery, and drugs and pharmaceuticals have seen a decline in their share of total exports.

The third worry is the sluggish performance of the core sector. At the end of February 2015, overall growth of the eight sectors is 1.4% as against 6.1% at the end of February 2014. Of the eight sectors, only coal, cement and electricity have registered growth at 11.6, 2.7 and 5.2%, respectively. The decline in steel is particularly worrying—from 11.5% at the end of February 2014 to (-)4.4% at the end of February 2015.

Some other pieces of news drifting in should also worry the government. Developments in West Asia and the pressure they may exert on oil prices. Unseasonal rain that has reportedly affected crops on 106 lakh hectares of land. Private flour millers have signed contracts to import 80,000 metric tonnes of Australian wheat.

Shut out distractions

Amidst all these, the value of the rupee should be the least of the concerns, especially when the declared policy is that the exchange rate will be determined by the market. Unfortunately, the election rhetoric and a false sense of pride have clouded the issue. If the exchange rate is a matter of pride, Japan should be only half as proud as India (120 yen to a dollar) and China 10 times more (6.2 yuan to a dollar)! My advice is, leave the rupee alone, unless there is unusual or extreme volatility.

The government and the RBI have their work cut out. The Prime Minister should resolutely shut out all distractions (religious conversion, ban on cow slaughter, joint session of Parliament, GUJCOCA, frequent foreign travel) and focus on the economy. Much will depend on reviving export growth, production of coal, generation of electricity, manufacture of steel, cement and fertilisers, accelerating the building of infrastructure, especially roads and railways, and enhancing productivity across all activities. There is no time to be lost.

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  1. C
    C
    May 4, 2015 at 7:39 am
    A well written article; it was a wrong notion that the exchange rate rupee was a reflection of the economy. Often it was the other way round; a weak rupee helped exports and discouraged imports thereby giving a boost to the local production. This would be evident if one looked at the performance of the rupee and that of the economy during the decade of UPA regime. While the rupee fell from an average of Rs 45 to a dollar in 2004 to Rs 61 in 2014, the merchandise exports increased five folds in dollar terms from $ 64 billion in FY 2004 to $ 314 bn in FY 2014, giving a compounded growth rate of 18 percent p.a. Likewise, the software exports increased from $ 20 bn to $ 86 bn during the same period. Also, the GDP in real terms doulbed thereby registering an average growth rate of 7.6 percent p.a, the best growth rate ever achieved for any ten-year period since the independence! As against that, in FY 2015 the exports were flat, while the rupee was nearly stable. Even if one excludes the exports of petroleum products, the value of which has steeply fallen in the past one year, the growth in exports in FY 2015 was only 2 percent. However, the violent fluctuation in the exchange rates, as one saw in 2013, needs to be avoided. One wished if the author explained as to what went wrong in 2013 when the rupee registered a steep fall to Rs 69 to a dollar and quickly recovered to Rs 62. It would be a daunting task for the present govt to match the UPA performance of a 18 percent p.a growth in exports and any strengthening of rupee would make matters worse.
    Reply
    1. M
      MM Singh
      Apr 10, 2015 at 5:01 pm
      This fellow is the main culprit for all the troubles we are facing in Indian economy. The man who said that Mr. Modi's economic knowledge can be wrotten on the back of a stamp, has spoiled the entire coutrys economy during his FM tenure. Don't know why he got educated at Harvard and boast that he is a great economist for bringing down the economy of a good country.
      Reply
      1. J
        jagathees
        Apr 5, 2015 at 2:59 pm
        Really Good suggestion to the government. But the current people dont have broader vision like you. They will only talk , Talk, Talk,... They never do anything.. because they dont have knowledge.
        Reply
        1. K
          Kumaresan
          Apr 10, 2015 at 5:08 pm
          The great spoiler of our economy Mr. PC. understand he is ploughing his own fields as the congress in TN has split and this fellow s not wanted by any faction. that is why he is crocking.
          Reply
          1. M
            Mahavir Kapshe
            Apr 5, 2015 at 1:40 pm
            All the time we have been discussing and are worried about inflow of funds from developed countries. Had there been only our country existing on this earth, what we would have done ? Had we survived or not ?
            Reply
            1. R
              Raj Patel
              Apr 28, 2015 at 11:53 pm
              Stronger rupee equals lower energy cost, lower commodity price, lower inflation. We have huge productivity gap, hence wages can be same, products can be compeive. It's easy to have weaker currency but takes a lot to have strong currency. Chidambaram as always wants to take easy route. Has he ever talked about being competative by increasing productivity. If you want to have stronger economy and real wage growth, you cannot get by weakening currency.
              Reply
              1. S
                Sadasivan
                Apr 5, 2015 at 7:31 pm
                All are mere talkers but slaves of the IMF which is misusing the G 20.
                Reply
                1. S
                  Sadasivan
                  Apr 5, 2015 at 7:29 pm
                  When the BoJ,BoE and the ECB are and the US federal reserve was, on a mive QE spree,there is no point in talking about the strength or weakness of the Rupee. This very same person was taking the Rupee to 68 from 44 to raise the rice of petroleum fuels to favour the PPP partners of HPCL [Mittal] and BPCL[Oman oil co] . When the World has a FIAT Currency as the reserve one,the ,result is choas. Especiailly when the nation which has its currency as the Reserve one behaves irresponsibly;y,and is a parasite on the rest of the World. Chidambaram was very bad as a finance minister and he does not have a locus standi to criticize anyone,especially when he and M M Singh left the "coffers empty" as jaitley claims..UPA unpatriotic ally resorted to "scorched earth' policy" when it knew of its defeat.
                  Reply
                  1. T
                    t p
                    Apr 5, 2015 at 4:26 pm
                    Kabhi pyase ko paani piyaya nahi , dead ko amrit pilaane se kya phaydaa.
                    Reply
                    1. T
                      tvskunaratnam
                      May 2, 2015 at 11:03 am
                      how could US$1 =50INR,how could slums in america worst than some clean towns in india can have their currency overvalued than india,how a country like infested with guns and higher crime have their currency overvalued,the exchange rate system for currencies has a flaw,it need rectification
                      Reply
                      1. U
                        Uday
                        May 1, 2015 at 2:57 pm
                        Look who is talking now...heights of shamelessness...
                        Reply
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