Need to Strengthen the Rupee

Dr. Ashwani Mahajan
Inherent strength of any country is shown by the value of its currency. If its currency is strong vis-a-vis other currencies, country is considered to be stronger and if its currency is weak, then it will be called weak; though, at times some people, particularly the exporters would argue that, it is imperative to weaken our currency in order to increase exports. When the country achieved independence, exchange rate of rupee vis-a vis dollar was, 3.3 rupees a US dollar. Time changed and in 1966, the first major devaluation of rupee was made and a dollar became worth nearly rupees 7.5. This exchange rate lasted for decades, as exchange rate was largely controlled. However, even before the era of liberalisation and globalisation started, the process of rupees currency devaluation had started in 1981-82. One USA dollar in 1985 was worth Rs 12.38 and by August 2013, rupee depreciated to Rs 68.84 per dollar.  Though in the meanwhile, rupee did improve to 62.6 but again in a dollar February 2016, it depreciated to Rs 68.82 per dollar, before improving in May 2016.
Exchange rate of any foreign currency in a country is determined by the demand and supply of foreign exchange. Say, the value of the Indian rupee against the dollar will be determined by demand and supply of dollars. Due to fast rising imports, there was an unprecedented increase in demand for dollars. Our huge software exports revenue, FDI and remittances sent by NRIs also proved to be inadequate, in filling the deficit caused by fast increasing imports, and rupee continued to decline due to fast rising demand for dollars.
The reality is that with adoption of new economic policy after 1991 and the implementation of the agreements of the World Trade Organization in 1995, tariffs were reduced significantly and all the restrictions imposed on imports were eliminated. Now, under the present international trade agreements, there was hardly any scope for raising tariffs and imposing non- Tariff barriers. This resulted in unprecedented increase in our imports. Our total imports in 1990-91 were US$ 24.1 billion, which increased to 490.7 US$ billion by 2012-13. The deficit in balance of trade, which was   US$ 5.9 billion in 1990-91, grew to US$ 190.3 billion in 2012-13. Similarly, our current account balance of payments deficit in 2012-13 sky rocketed to US$ 88.2 billion.
No Reason for Weak Rupee Now
In the last few years, declining prices of petroleum products, metals and due to restrictions imposed on import of gold, our imports started declining and deficit in Balance of Trade decreased from US$ 190.4 billion in 2012-13 to US$ 137.0 billion in 2014-15. However, despite that, rupee slides from 54.4 per US$ in 2012-13 to 62.6 per US$ in 2014-15; and in the meanwhile on August 28, 2013, it reached a record low of Rs 68.84 per US$. However, we find that after improving to Rs 62.6 per dollar, rupee dipped once again to 68.8 by February 2016. Noticeable is the fact that the balance of payments on current account is expected to touch a surplus of US$ 3 billion the last quarter (January to March, 2016) of financial year 2015-16. Foreign direct investment also reached a record level of US$ 39.3 billion during 2015 and therefore supply of dollars in the country has been more than the demand for dollars. This is a matter of regret that despite most comfortable payment situation, our money is steadily becoming weaker and in February 2016 reached the level of 68.8 rupees per dollar.
The Role of Portfolio Investors
While we witness significantly high rate of growth of GDP; grim growth scenario and slowing down of growth globally; fast worsening economic scenario and stock market turmoil in China has made portfolio investors wary about security of their investments. Due to heavy selling by portfolio investors in Indian stock markets, rupee has been facing unforeseen pressure. Rupee has not only faced uncertainty but has also moved down significantly. We also find that as and when portfolio investors make net selling in Indian stock markets rupee takes a deep.
What is the Effect of the weak rupee?
If the rupee is weak, we have to pay more rupees per dollar. This implies that petroleum products would become dearer, other imports including finished goods, spare parts, intermediate products, metals, etc. would also be costlier. Today our imports are nearly 28 percent of GDP. Therefore if rupee weakens by 10 percent and thus import prices increase by 10 percent, inflation will go up by 2.8 percent. Weak rupee also means that we have to pay more rupees to repay principal and interest on foreign debt, both government and private.
The need to strengthen the rupee
Exporters keep on arguing that rupee must depreciate to give boost to export. Accepting their argument rupee was devalued in 1964 and then in 1983. Later on rupee kept on depreciating and at present the exchange rate of rupee vis-a-vis dollar is 67.3 rupees per dollar. Contrary to the arguments of exporters, rate of increase in imports has always been greater then rate of increase in exports, despite constantly depreciating rupee. This happens because most of our imports and exports are not price elastic. Therefore, on the basis of economic principles, there is a need to strengthen the rupee, if the situation permits. Mostly upheavals in rupee are caused by outflow of funds by foreign portfolio investors. There is a need to discipline portfolio investors. Minimum three years lock-in period and tax on their profit are some measures to impart discipline in foreign portfolio investors. Today, there is no reason why RBI should sit idle amidst exchange rate upheavals. Need of the hour is that whenever there is an outflow of foreign exchange by FPIs, RBI releases sufficient amount of dollars to arrest any fall in rupee.
(The author is Associate Professor, PGDAV College, University of Delhi)
feedbackexcelsior@gmail.com

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