Good news: Indian rupee appreciates
The rupee’s recent appreciation to below 60 a dollar is a great news. Indian economy is being
viewed much more favourably today. Expectation
of a “business-friendly” government taking office in May appears to have
influenced foreign investors to flood the stock markets with relatively cheap
money borrowed from abroad.
The rupee’s sharp appreciation poses to the Reserve Bank
of India a different set of challenges. No doubt that RBI will try to defend
the rupee by selling dollars and also by drawing down reserves. It is now
reportedly mopping up surplus dollars. While that will increase the size of
reserves and provide a kind of insurance against currency volatility, the
surfeit of rupees released will enhance liquidity and could be inflationary.
Appreciation of the rupee will lead to contraction
in gold imports and a fall in non-oil imports. Policy measures to suppress gold
imports cannot last for long since it will lead to smuggling.
Rather than being afraid of appreciating rupee, we
have to concentrate on reducing the production costs which will place us in a
more advantageous position. The low cost
of Chinese goods is mainly due to cheaper production environment. For producing
a product, a person need not spend too much on electricity (i.e. hefty
electricity bills) unlike India and at the same time need not worry about power
cuts. Hence, a manufacturer in China is at a more advantageous position for
exports with low production cost and good returns. We have to strive to
maintain such a balance.
The real value will be one after elections are over and
when new government will be formed. Rupee decline was the gift of United Progressive
Alliance to the people of India. So when the UPA is decimated it will stabilize
and seek its real value.
A strong rupee is always a deterrent to exports. India
must use its soft power to convince other economies to sign more Free Trade Agreements
(FTAs). South East Asia alone is a big market and any developments enabling
closer ties through FTAs would go a long way in reducing India's trade deficit.
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