Sliding Rupee Isn’t Bad

Strength of a country need not always be tied to the strength of its currency. Sliding value of the rupee against the dollar could push up imported inflation and increase cost of repaying loans taken in dollars.

But there’s another side to the coin: exports. When Nirmala Sitharaman told Parliament that ‘Overvalued currencies erode national competitiveness’, she was referring to exports.

A weaker currency makes goods cheaper in international markets, boosting exports.

 In a global market, assessing the rupee in isolation from other currencies can be misleading. Almost every currency is depreciating against the dollar, as Trump’s policy promise higher returns for investors in the US.

 A key benchmark for the rupee’s strategy here is the renminbi. To maintain its competitiveness, India must keep pace with the Chinese currency.

 If the rupee remains strong while the renminbi depreciates, Indian exports will suffer, and imports from China will rise, undermining India’s ambition to promote domestic manufacturing.

The rupee has been overvalued compared to a basket of currencies that compete with India in global markets. A strong currency can harm, rather than help, the economy.

Nations often devalue their currencies to gain competitiveness. Remember India’s 1990s BoP crisis and the sharp devaluation that followed? Even the US forced down the dollar’s valued against the renminbi and other currencies with the 1985 Plaza Accord.

Unlike previous episodes of rupee slide driven by CAD, this time, it’s due to capital outflows and rising dollar demand from oil importers, amid weak appetite in global markets. Once Trump’s wave of executive orders settles, global currency markets – and the rupee – should stabilise.

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