The rupee trick

On Thursday evening, was mildly concerned to see this story in MINT. That there was a brief flutter in the Indian rupee on the rumours of a possible meeting between the Ministry of Finance and Ministry of Commerce and Industry on Sept. 20 to decide on the appropriate value of the rupee.

The idea is wrong on many counts. Where there is no fixed exchange rate system, there is no devaluation. Government cannot do that. Second, it is wrong not to consult RBI on what the fair value of the rupee is. Third, this is no answer for India’s export woes, unless the talk itself counts as ‘deliberate devaluation’! Then, it is fine, at a tactical level. Some minor relief. Nothing more and nothing less. No big damage done.

But, if they are serious about it, then they are wrong. Besides the above, it ignores balance sheet implications. Indian companies have just issued Masala bonds and it would strike fear in the hearts of investors. India needs to raise money from overseas. Gross National Savings are stagnant and household savings rates are declining.

When global demand is weak, lowering the currency would not achieve much in terms of improved pricing for exports except to make imports costlier and foreign currency liabilities bigger!

Read this well-written edit in FE on how India’s export problems are not because of the exchange rate. It cites the example of Textiles sector but, across the board, the story would be replicated.

With the Minister’s call for aggressively low interest rates and this rumour allegedly emanating from Ministry of Commerce and Industry, it is not quite clear to me that the Ministry understands the implications and consequences of what it is doing.

Get to work on productivity on mission mode.

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