How to revitalize the Rupee

How to arrest Rupee’s slide?

Rupee slid to an all time low of Rs 58.15(11-6-2013) against the dollar as against Rs 57.32(June 28,2013)/dollar sending shock waves to the worried exporting fraternity, who have put on hold export dealings for the time-being in anticipation of better tidings. It could further erode to touch Rs 60/to $1, if no effective steps are not undertaken. Government’s lax in providing excuses instead of finding a permanent solution to the vexed problem is a result of party paralysis.

The slowdown in exports will irrestibly reverse the momentum of reforms, which is already shaky. It will impact economic growth momentum to the Asia’s 3^rd largest economy which has been beset with sharp deceleration of growth, worsening the public finances; Balance of Payment position (insufficient reserves in FER) (present FER enough to tide over only for 7 months)(the lowest ever in the last 13 years). Export substitution by importing inputs has made exports less glamorous due to pricing difference and thin margins. Fluctuation in the capital inflows has been a cause for Rupee weakening, says PM’s advisor C Rangarajan. Once the inflow eases, the weak Rupee will gain, he says. Experts don’t bite this bullet.

Partially convertible Indian currency’s nose drive has affected Indian exports adversely..

RBI’s inaction cannot be justified. There is a risk that needs to be taken note of in the currency fluctuation territory. There is also management of currency fluctuation for which remedial measures need to be taken. But RBI does nothing but remains passive. RBI needs to herald a realistic Policy by putting place humps which will restrict Rupees bump. A mature exchange risk mechanism should be an addendum to RBI’s annual fiscal Policy to control erosion of the Rupee value against greenback.

RBI’s present practice of piecemeal market intervention must be replaced by Policy intervention to stabilize Indian Rupee.

The problem rose in 2002 when Bimal Jalan was the Governor of RBI. He did nothing to look into the symptoms or the disease to arrive at an equitable policy mechanism. His successor too, did nothing (Dr YV Reddy). Subba Rao, is wild off the mark towards the issue. In 2002, Rupee was Rs 48.7341 to a dollar. Down 7 years, the value came down to Rs 40.82 (2007). The Tirupur Exporters Association (I was its Executive Secretary then) submitted a paper suggesting methodologies to rein in Rupees abrasion. In 2007, India’s exports rose from $ 40 billion in 2002-03 to $ 140 billion, which resulted in our Foreign Exchange Reserves turn around about $ 275.954 billion which was adequate to meet 1 year’s import bill.

Reckless import Policy which saw import of Rs 65 K Cr (edible oil), 100 K Cr (Gold), 40 K Cr (other imports0, burdened the exchequer in addition to import of petroleum products. While the economy suffered against import of petroleum products, and their domestic prices were often raised by the Oil companies which fuelled inflation. India’s higher BoT and the widening gap between BoP and BoT created huge trade deficit which affected economic growth. The price instability caused by high cost of import of inputs for export substitution substantially pushed the cost of production while the export returns were not commensurate with the high costs resulting in trade disadvantage.

RBI’s belief that crisis will blow over time and normalcy will return automatically is an undesirable economic conclusion which does not stand the test of theories. This is a faulty thought, part of policy paralysis, which has affected various growth institutions curtailing its growth. Services sector has borne the brunt of such a fallacy of thought; off shore infrastructure costs override few profits of the on-shore activity. IT industry is for Himalayan trouble.

It is high time, government and RBI take cognizance of the problems manifest in the Rupee devaluation direction. MoF would do well to keep quiet and leave it to RBI to do its job