With the strengthening of the rupee
over the past year, calls for the Reserve Bank of India (RBI) to step in to ensure a more competitive exchange rate
regime are increasingly gaining traction.
As Chart 1 shows, from 66.2/$ at the beginning of the previous financial year, the rupee
fell to 68.8 in November, after the demonetisation.
Since then, it has strengthened considerably, touching 63.6 on August 8, 2017. On the RBI’s real effective exchange rate
(REER) too, the rupee
is overvalued, as shown in Chart 2.
While many have questioned the way this index has been constructed and it also does not account for productivity differentials between countries, the REER
does show that the rupee
has been consistently overvalued since the previous year. Compare this with the performance of other currencies. Over the same period, India’s export competitors, such as China
and Bangladesh, have seen their currency fall by 2.7 and 3.1 per cent, respectively, as shown in Chart 3. Only the Brazilian real
and the Thai baht
In Q1FY18, exports of major labour-intensive sectors such as leather products, gems, and jewellery contracted, as shown in Chart 5.
The expansion in exports
since August last year appears to have moderated, as Chart 4 shows.
On the other hand, while imports growth appears to be stronger, it has dipped recently (Chart 6).
A report by the HSBC Global Research suggests domestic bottlenecks alone account for 50 per cent of the growth slowdown in exports
of goods and services, followed by world growth at 33 per cent. Exchange rates account for only 17 per cent of the slowdown (Chart 7). But compared to the other factors, gains from a more competitive exchange rate
are easily secured and accrue in the near-term.