Rupee should reflect its true value, say experts

The debate over the 'correct' value of the rupee is brewing again with the commerce ministry pushing a Cabinet note in this regard. The note has proposed that an 'official mechanism' be set up under the finance ministry's Department of Economic Affairs with representatives from the commerce ministry as well as the Reserve Bank of India (RBI). The idea is to determine the correct value of the Indian currency with an aim to boost exports, which would require the rupee to weaken against currencies of the trading nations.

The Cabinet note, circulated by the commerce ministry in July, refers to a study by economic policy think tank Indian Council for Research on International Economic Relations (Icrier). The rupee, according to the study is 'overvalued' by 10 per cent against the dollar, as on March 31, 2015.

While exporters prefer a weaker rupee to boost exports, economists advise caution pointing out that India is a net importer.

According to Jaimini Bhagwati, one of the authors of the Icrier study, the issue is not that whether the currency should weaken or strengthen against major currencies but that the rupee should have its correct value.

"We need to have a fairly balanced currency, which has implications across trade, investments and income," he said. "It is important to assess the conditions of the currency and appropriately value it, moving away from the debate over whether it should be weakened or strengthened."

Bhagwati said RBI had mentioned in its latest annual report that the rupee was overvalued by as much as 15 per cent, adding that several methods existed to properly determine the valuation of a currency. One of these is real effective exchange rate (REER), which calculates the strength of the rupee against a basket of 36 major world currencies based on weights assigned according to bilateral trade, adjusted for inflation. The REER had shown the rupee was 26 per cent overvalued against dollar as on March 31, 2015 over a 10-year period.

Bhagwati pointed out that the current time might be good for revaluating the rupee as oil prices were still low. However, others say the exchange value of the rupee is a domain of the Reserve Bank. "The management of the exchange rate is best left to RBI. Depreciating the currency could have an impact on the entire economy as it will also push up import prices," said ICRIER Director Rajat Kathuria.

RBI has made it clear in the past that its primary focus is on bringing down currency volatility and it is not for any particular value of the rupee.

Experts have warned that with a large number of commodities going through high deflation globally, relatively higher currency exchange rates are hurting India's competitiveness. Since this deflation affects both importing and exporting nations, it has been argued that Indian goods need to be priced lower. India's merchandise exports contracted for 18 months till May this year, slightly growing one per cent in June and falling again in July.

With India being a net importer, this might be a difficult step, said Devendra Pant, chief economist at Indian Ratings, India's imports stood at $381 billion in 2015-16, compared with $262 billion worth of exports.

"From the perspective of trade, it is important to keep in mind that there are other issues dampening exports. For example, the chronic lack of demand globally continues to hold ground," Pant noted.