Weaker rupee to help exporters, low inflation means it doesn't pose a risk

The rupee on Wednesday breached the psychological level of 90 a dollar in trade and has fallen over 5 per cent since the beginning of the year. However, it is important that this depreciation is seen in the context of broader macroeconomic developments, and policymakers and other stakeholders do not get carried away by its specific levels. The data shows that the balance of payments in the second quarter this financial year turned negative to the tune of $10.9 billion, as against a surplus of $18.6 billion in the same period last year. The trade deficit has also widened, and economists are expecting the current account deficit to expand this financial year. It has also been reported that the Reserve Bank of India (RBI) is not aggressively intervening in the currency market, which is a sensible policy choice.

 

In a situation where the balance of payments has turned negative, the currency would be expected to depreciate and act as a stabiliser. The currency-market movement is also being influenced by the India-United States trade position. India is facing a 50 per cent American tariff, which has started to affect exports. While some segments are reported to have found alternative markets, the data on this must be interpreted carefully. High-value items such as gems & jewellery may be getting rerouted from other markets to the United States (US) and may not be sustained. Thus, it is important that India and the US arrive at a mutually beneficial trade deal as soon as possible. Negotiators on the Indian side have expressed hope that an agreement will be finalised by the end of the year. 

However, it is unclear how the agreement will affect the India-US trade over the medium term. Given the context of global trade, a weaker rupee will help Indian exporters. Although rupee depreciation will not be enough to offset the current US tariff disadvantage, it will help Indian exporters find other markets to some extent. The latest RBI data shows that the rupee has also fallen in real terms as reflected by the real effective exchange rate. Currency weakness in the present situation will be useful for exporters. Notably, as highlighted in a recent analysis in this newspaper, while the rupee has declined against a basket of currencies, in real terms, it has appreciated significantly against the Chinese yuan since the pandemic. This makes Chinese imports much cheaper in real terms and can worsen the trade deficit with China.

 

Therefore, the ongoing depreciation is in India’s favour and will help provide some protection to the tradable sectors of the economy. The RBI is holding foreign-exchange reserves worth over $688 billion, which will help ensure that the conditions in the currency market remain orderly. In the immediate short run, the value of the rupee will be influenced by the outcome of India-US trade negotiations. It will not only sway outcomes on the current account but also on the capital account. A favourable deal will encourage foreign-portfolio investors (FPIs) to start buying Indian assets. FPIs have sold Indian assets worth over $15 billion so far this year. The ongoing Monetary Policy Committee meeting will likely also deliberate on the implications of developments in the currency market, though these may not sway its decision. Given the low-inflation environment, a weaker rupee does not pose a risk.