The rupee opportunity

The rupee, alongside other emerging market currencies, has had a few turbulent days. Following an extraordinary attack by Turkey’s president, Recep Tayyip Erdogan, on the US and global financial markets, the Turkish currency, the lira, took a special battering. Its fall has been the highest since 2001; in just a few months it has gone from about four lira to the dollar to around seven. Mr Erdogan’s open defiance of the financial markets came at a time when the US appeared unwilling to provide stability, with US President Donald Trump announcing on Twitter that tariffs on Turkish steel would, in fact, be increased. As a consequence, concern rippled through emerging markets — sending the rupee, in particular, to its lowest value against the dollar. It is now perilously close to 70 to the dollar. It is important to note that this development is not without its advantages. As long as there is no excess volatility in the foreign exchange market — an outcome which is the Reserve Bank of India’s (RBI’s) job to ensure through timely intervention — a certain weakness of the rupee is the need of the hour. 

In fact, it could be argued that the rupee has not weakened sufficiently against the currencies of its peers but against the dollar, which has gathered strength amid the slow and long-delayed tightening of monetary policy by the US Federal Reserve. As a matter of plain fact, India’s competitiveness has been gravely hurt by an exchange rate policy that has prioritised a muscular rupee. An examination of the real exchange rate of the rupee — as measured not just against the dollar but by the 36-country index of trading partners maintained by the RBI — would show that it has, in the four years to January 2018, gained in strength by 20 per cent. This amounts essentially to a 20 per cent tax on exporters. Is it any wonder that exports were largely flat for years, and that Make in India struggled to take off? The priority for the RBI should be to manage the fall of the rupee — a fall brought on by structural considerations, such as increasing weakness on the external account brought on by a sustained inability to compete in world markets.

A world with a weaker rupee is one in which India’s trade policy can and should be re-examined. Over the past years, stagnant exports have encouraged autarkic tendencies within the government, which has led to a series of tariff increases among other protectionist acts. This is short-termism at work. Instead of tariff tweaks or “special packages” for exporters, what is needed is an all-round attempt to make Indian exports more competitive — an effort which would be kick-started by a rupee at historic lows against the dollar. The next steps in this strategy should be ensuring that exporters have easier access to tax refunds; a war-footing attack on red tape at the borders; and a clear commitment to opening up to new market-enhancing trade deals. The rupee’s historic lows are not to be mourned, but to be seized as an opportunity.

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