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Why RBI should curb rise in rupee

By T N C Rajagopalan
March 17, 2014 16:51 IST
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The disturbing aspect about the fall is that it comes as the US and European economies are relatively more stable and improving

The February 2014 export figures show a decline of 3.7 per cent in dollar terms over a year, raising apprehension that rising costs have eroded any gains to exporters through a weaker rupee.

In fact, with the exchange rate of the dollar to the rupee around 62 for some months, it was only a matter of time before export figures started to show a decline; the trend has been downward for some time. It is little consolation that most developing countries, including China, showed very little export growth recently.

The disturbing aspect about the fall is that it comes as the US and European economies are relatively more stable and improving, with Japan also recovering slowly. More significant, the decline comes in the last quarter of the financial year, when most exporters put in extra effort to expedite shipments and improve their annual performance.

The reward of the incremental exports incentivisation scheme, which gives a duty credit of two per cent of an increase in exports in 2013-14 over those in 2012-13, is reason enough for a push. However, exporters seem to be getting priced out by competitors in labour-intensive sectors.  

It appears exporters’ woes do not ring any alarm bells in the Reserve Bank of India, as imports have also shown a year-on-year decline, of 8.65 per cent during the first 11 months of the current financial year; the trade deficit is also down 29 per cent in the period.

The fall in the current account deficit to 0.9 per cent of gross domestic product in the third quarter might be heartening news for RBI and cause enough to let the rupee strengthen. Yet, lower export means fewer jobs and the lower import and trade deficit figures only point to falling domestic growth and demand.   

The pre-election rally in the stock markets shows a rush of foreign investors picking select stocks, in the hope that emergence of a decisive and business-friendly government will boost these and help them make handsome profits.

Another theory says illegal money kept abroad is being brought in to fund the elections. In any case, the supply of foreign currency outstrips the demand, strengthening the rupee further. The Reserve Bank seems to believe there is no need to intervene in the markets, as these will correct by themselves.

The commerce ministry can do very little at this time, as the election code of conduct is in place. The second task force to cut transaction costs in exports, constituted in April 2013, has held six meetings but is yet to issue any suggestions or a report.

The report of the High Powered Inter-Ministerial Committee for boosting exports from the MSME (micro, small and medium enterprises) sector is gathering dust. All the effort of the commerce ministry to give more duty credits to exporters under various schemes seem of little help when the rupee is overvalued.

Strangely, exporters seem to be at the mercy of portfolio investors, whose perceptions determine the exchange rates. Their only hope is that the Reserve Bank will start managing the exchange rates.

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T N C Rajagopalan
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