New Document top_band
 
Business Standard

T N Ninan: Welcome the fall

The rupee needed to fall, because there was no way to narrow the massive trade deficit other than by changing currency-induced price signals for importers and exporters

Related News

The ’s fall has been the cause of much anxiety and nervousness. Halfway round the globe, in Brazil, a similar fall in the value of the real has caused something akin to celebration. Why this difference in responses? I would suggest that the Brazilians have been more sensible. The real had been on the upswing in recent years. Brazil is a commodity exporter and the commodity price boom gave strength to its currency, which climbed from 2.07 to the dollar three years ago to a peak of 1.58 a year ago. Now it has dropped back to 1.97. In percentage terms, the fall over the past year has been 24.7 per cent, which is similar to the rupee’s fall in the same period (the rupee too had climbed between 2009 and 2011, but by less — because India is not a commodity exporter). The question is, should the rupee have fallen from its level of 44.9 last May? The answer is: unquestionably yes. Measured against a basket of currencies, and adjusting for differential rates, the real value of the rupee was about 16 per cent higher than it should have been. Even late last month, it was nearly four per cent higher than an index level of 100. Viewed from that perspective, the six per cent fall in May has been only mildly excessive — and markets do tend to overshoot. The rupee needed to fall, because there was no way to narrow the massive trade deficit other than by changing currency-induced price signals for importers and exporters.

The devaluation is beginning to pay off. Gold imports were down 29 per cent in January-March (compared to a year earlier); after the duty hike on imports announced in the Budget, the fall can only get sharper — one forecast says 38 per cent this year. Meanwhile, it helps that global oil and gold prices have dropped by about 15 per cent from their peak. These are the two largest items in the import basket, but there is also the more general drop in commodity prices (metals, agricultural items, chemicals), reflected in the drop in the CRB commodity price index by 20 per cent from its peak in May 2011. So global price trends have been helpful. The general impact of rupee depreciation will be over and above these, and should in the ordinary course squeeze imports and encourage exports. You might even see the current account deficit drop to 2.5 per cent of GDP (about $47 billion). That would be safe territory because capital inflows (portfolio and direct investment) are usually more than that, so there would be no need to draw down forex reserves.

A falling currency is a sign of weakness, and the decline of the rupee reflects the many ways in which the economy has been mismanaged; the loss of competitiveness gets neutralised through a cheaper currency. Some players may have got caught unawares by the sudden drop, but commentators have woken up to the positive macroeconomic effects of the rupee’s depreciation. Players should be relieved that a key element of macro-adjustment has been more or less achieved — partly through fortuitous commodity price movements. While it is always dangerous to make short-term forecasts about markets, it is logical to assume that the rupee has found an appropriate level. The currency depreciation that has happened so far should give a boost to exports and to import substitution; both will give a fillip to domestic economic activity. This is not the end of the economy’s many problems; the is still large, and the rupee depreciation will add to inflation. Still, an important macroeconomic imbalance has been addressed.

 

Read more on:   
|
|
|
|

Read More

Ajit Balakrishnan: Indian schools' new social filter

The first sign of trouble appeared in January this year. Fifteen-year-old Alzira’s class teacher summoned her mother, Tina, and warned her that if ...

Most Popular Columnists

Mihir S Sharma

Mihir S Sharma: Eminently funny historians
Mihir S Sharma

Hindutva historians totally deserve to be read

Nitin Pai

Nitin Pai: MH17 and the 'non-state actor' charade
Nitin Pai

Here's what happened: Russian proxy fighters in the Donetsk region of Ukraine shot down a Malaysia Airlines civilian aircraft - flight MH17, carrying ...

Abheek Barua

Abheek Barua: The rising vulnerability of emerging markets
Abheek Barua

Emerging markets could be affected by a combination of lower liquidity and higher dollar interest rates caused by a hike in the US Fed funds rate

Advertisement

Columnists

Indira Rajaraman

Indira Rajaraman: Dismantling food inflation
Indira Rajaraman

The most important features of the Union and Rail Budgets for 2014-15 are the micro-interventions that address food inflation

A K Bhattacharya

A K Bhattacharya: Two months and two signals
A K Bhattacharya

The first couple of months for a new government are always crucial as this is the time when it lays down its broad framework of policies and ...

Vanita Kohli-Khandekar

Vanita Kohli-Khandekar: Welcoming FDI in news
Vanita Kohli-Khandekar

Allowing foreign investment will push media firms to clean up their act and put in place systems that will allow good journalism to flourish

Back to Top