A Look At The Rupee Since 1990

The rupee has depreciated by 115 per cent during 1990-97. This depreciation, from Rs 18 per dollar in 1990 to the present level of Rs 38.9 per dollar, is sharper than that of most of the countrys trade competitors in Asia.

The period has seen India and other Asian countries follow export boosting policies.

During this period, the Philippino peso depreciated by 34.6 per cent, the Korean won by 63.14 per cent; the Malaysian ringgit by 35.55 per cent; the Indonesian rupiah by 118 per cent; and the Thai baht by 57.69 per cent. Ahead of the currency crisis, while the rupee had depreciated by 101 per cent, most of the Asian currencies remained range bound.

 

Though the base year selected for comparison is critical, the medium-term is important for assessing the impact of exchange rate on trade performance.

The medium-term data on the relative movement of currencies goes against the case for competitive devaluation of the rupee which has been made in light of the recent depreciation of currencies of Indias trade competitors in the Asean region. From the mid-1990s till 1995, these countries witnessed double-digit exports.

From 1990 onwards, up to the crisis, these countries currencies barely moved. Since these currencies were pegged to the dollar, they appreciated in real terms as the dollar strengthened. However, the REERs substantial appreciation did not dampen exports in this region which saw demand-led growth.

In this period, Indian exports picked up, though not in the same proportion, while the rupee steadily depreciated in nominal terms. Whenever it appreciated in real terms, it was corrected by the market forces. This does not suggest a correlation between export competitiveness and exchange rate movements.

Much of the export growth of the Asian countries was demand-led. However, their exports which comprised largely of electronic goods, were adversely affected due to a global glut in this sector. The regions capacity for technical innovation and product diversification is suspect since much of the capital inflows to the region were used for property development and manufacture of electronics.

The first sign of trouble was the slowdown in exports in 1996, the worst affected being Korea, Malaysia, and Thailand.

In comparison, in the early nineties, the growth in Indian exports was not dismal. Export growth was negative at -1.1 per cent in 1991, and 3.3 per cent in 1992, despite the rupees devaluation to Rs 24.5 to a dollar from Rs 18. However, after that exports saw a double-digit growth, clocking a high of 20.9 per cent in 1996 when the rupee was at Rs 33.46 to a dollar.

In 1996, however, slowdown in world trade hit Indian export growth which slipped to 13 per cent despite a rupee depreciation to Rs 35.7 per dollar in nominal terms.

In tandem with the export slowdown, current account deficits of Asean countries widened substantially. India fared relatively better with its current account deficit down at $5.8 billion in 1996 from $5.9 billion in 1995.

Weaker fundamentals, short term forex liabilities in excess of foreign exchange reserves much of which was invested unproductively, have landed the Asean countries in the crisis they are currently in, and in view of this, the depreciation of their currencies is probably warranted.

However, in India, the market has ruled for most of the period since 1993.

Hence, an unusually strong correction of the rupee now may not be called for and may be left to the play of market forces, irrespective of what the exporters say.