India’s policymakers appear concerned about the rupee strengthening against the US dollar but prefer not to do something about it. With the prospect of national elections in the near-term, a rising rupee is, no doubt, useful in taming domestic inflation as it makes the country?s imports?global oil prices have hit record highs?relatively cheaper. Segments of Indian industry have also become highly import-intensive as they now have greater access to internationally available raw materials and intermediate goods. The question is, how high would policymakers allow the rupee to rise.
With a Rs 38-to-a-dollar exchange rate likely by end-2007, there is considerable pressure on the government to ensure a more competitive exchange rate. This doesn?t emanate only from exporters but include apex chambers of industry as well.
As India?s exports have slowed, the government needs to be concerned about why the rupee has gained most versus the dollar (12.5%) when currencies of rival exporting nations like China (5.1%), South Korea (2.2%), Thailand (11.8%), Pakistan (0.8%) and Bangladesh (3.6%) rose relatively less this year. Managing a more competitive exchange rate to shore up India?s edge is the key challenge before policymakers.
But will this spur them to act? Hardly. For starters, the policymakers? concern regarding the rupee?s appreciation also goes hand-in-hand with their reluctance to do something about a market-determined phenomenon whose dynamics lie elsewhere in the global economy. ?The rupee is stable against the euro and many other currencies. It?s only against the dollar that the rupee has appreciated in the last eight to nine months,? stated finance minister P Chidambaram during his recent US visit.
What is, therefore, most likely are only sops to exporters, including exhortations to keep lowering costs and upgrading quality and learning to live with a stronger rupee?like the Japanese did when the yen rose in the 1980s. They are also being advised to hedge, to re-price their export contracts and diversify to the euro rather than wait in vain for measures to rein in the rupee.
