Monday, December 5, 2022

Let the rupee fall: less dollar parity, faster growth likely

Shivaji Sarkar

The surging dollar and falling rupee are the most difficult aspects. It should be considered an opportunity than a crisis. India has to think and act differently.
Rupee hitting 81 to a dollar has made many have sleepless nights as stocks plunge 1021 points and RBI opens its purses to stabilize rupee and still it slipped to 80.99 after a brief rise to 80.87.
Let India not subscribe to the theory that rupee-dollar partiy decides our economy. The Indian economy has strengths beyond the obvious in its still partially surviving mixed economy. Finance Minister repeatedly harping on the resilience of Indian economy but the ministry and RBI apparently remain panicky at rupee fall. Let the oddity be considered a favuorable syndrome. The fall can be more profitable.
Thursday, September 23, RBI operations made it clear that interventions add to forex kitty losses and gains are restricted to one paise literally. The government cannot apportion the blame. It is beyond it. Is not there a way out? The government must realise it is not at all at fault, it cannot reverse the dollar trend even if the economy sprints to make a new record. In the present global scenario dollar would appreciate and India has to create the strength out of the falling rupee. It must get rid of the fad that rupee has to maintain a high level of parity.
Rather lower the rupee better it is for Indian economy. Trying to stabilize means as it is being said by Reuters, RBI preparing to lose $ 100 billion and achieving little. It must not do that. Allow rupee to sink. Indian economy knows how to swim and do better. The domestic economy can thrive with the dollars saved. It could be used instead to bolster the economy than reinforcing the US economy. Every fall of a currency helps it. Since last January the US has gained by its maneuverings to snatch the best of the world economy for itself. India itself has deployed $ 82.8 billion from its reserves. In September alone, it sold $ 10 billion with the RBI intervention. The forex reserves have come down to $ 550.8 billion compared with an all time high of $ 642.4 billion last year.
The intervention is not helping India as dollar rates are decided by international factors and US manipulations. In reality, each dollar intervention subsidises the US economy and not the domestic. In other words the US gains at India’s cost. Let the rupee fall and create new avenues.
When fall of rupee is orderly normally RBI allows the rupee to find its value. But when fall it is due to speculative activity RBI intervenes. RBI also acts when rupee crosses its comfort level which for many months had been 80. After the US Fed meeting raising rates by 75 basis point the fall in value of rupee is unprecedented. The recent RBI intervention could not control the abnormal fall.
The US was among the first ones to advocate movement away from gold standard in 1971, when President Richard Nixon closed the gold window in 1971 in order to address the country’s inflation problem and to discourage foreign governments from redeeming more and more dollars for gold.
They built military might and hegemony across the world. Plus they controlled the oil trade hedging it to dollars. Further the consumer economy it created forced the most of the world to look at it and exporting to US. Most of the world also resorted to dollar denominated trading as they were all receiving dollars for goods exported to the USA. This accorded dollar a reserve status. And almost all Central banks would park their surplus money with US treasury. So even though today US has a very high debt compared to its GDP, the dollars flowing in strengthen it.
China had been trying to challenge this status. It kept its currency artificially low. Russia and China are also trying to break the dollar stranglehold on oil trade post Ukraine war. Japanese currency is also undervalued but its economy thrives.
In case the rupee continues to fall with many global currencies, including Euro and pound sterling the advantages would be for the products like metal, pharmaceuticals, IT, host of cosmetics and products that are not import dependent. The products for the domestic market could even in the course of time get insulated from dollar-linked inflation. More so as crude prices have come down to around $ 80 a barrel. If the taxes on petrol and gas are cut the advantages would be more than gains in GST collections.
A depreciating rupee would make the Indian exports more competitive though imports of essentials may be expensive. An exporter is to earn more in rupee terms. The advantage could be that larger forex would be earned and the outgo would be less. The kitty not lost on stabilisation exercises could be used to help incentivise and indigenise domestic products.
There is a myth that foreign investors withdraw as the rupee falls. This is partially true of short-term foreign portfolio stock exchange investors who come for quick profits. But it makes little difference to long-term investors. They come with a different mindset and had been investing in many industries even before 1991.
It could also be great booster for checking uncertain technology and EV imports that is bound to raise India’s dependence on import of lithium-ion battery technology and coal, causing enormous environmental hazard. Yes, India can put off the emission norms to make its industry more competitive and remove checks on cheaper diesel use.
Imports might cost a bit more. But if the trend in crude prices continues major outgo would be checked. Industries that import components for their products could see a surge in cost. But chemicals and automobile prices may have discomfort with some rise in their costs. So higher export volumes spur economic activity and pricey imports lead consumers to opt for local alternatives. The EU has raised duty on Indian textile imports. The rupee depreciation may partially set off the adverse impact on Indian exports.
The RBI is bound to increase interest rates to keep investment flow on with checking the rising inflation and boost the growth path. Overall a falling rupee is not a liability for India as managed properly it would maintain domestic growth and has not much to lose externally.

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