In a bid to determine the right value of rupee for competitive advantage in export markets, the Ministry of Commerce and Industry has proposed setting up a “formal institutional mechanism.” The proposition is significant against the backdrop of the debate whether the Indian currency has been fairly valued or not.
The Cabinet note refers to a study by the Indian Council for Research on International Economic Relations (ICRIER) which had concluded that, as of March 2015, the rupee may be 10 per cent overvalued against the US dollar. An overvalued rupee hits exports.
Exports posted a contraction for the 18th straight month in May amid weak global demand, rose in June and has contracted in July again. The ICRIER paper published in June 2015 had attributed sluggish external demand to the rupee’s prolonged overvaluation. The paper concluded that the rupee’s trade-weighted real effective exchange rate or REER is 26 per cent overvalued as of March 31, 2015, compared to 2004-05. Under REER, the rupee’s strength is calculated based on a basket of six major currencies and also against 36 currencies, both based on weights assigned as per bilateral trade.
That is, the Indian currency looked overvalued against 36 other currencies on a trade-weighted basis, suggesting that the rupee ought to weaken in order to maintain export competitiveness.
The Cabinet note also proposes other reforms to export earnings. These include the establishment of a committee by NITI Aayog to address issues relating to standards in services and introduction of Centrally sponsored scheme to mainstream teaching of foreign languages in schools and colleges to enhance market access opportunities for the workforce.