The ‘record fall’ in the rupee against the dollar is once again in the headlines. The rupee has depreciated by six per cent against the dollar in the first six months of 203. The euro is down 11.5 per cent, the yen is down 12.5 per cent and the pound is down 12.5 per cent. The Chinese currency, the yuan, has depreciated by just 2.2 percent. But the currencies of Australia, South Korea and Pakistan have fallen even further. In such a scenario, the true news should be that the rupee has been stronger than almost all other currencies.
Successful long-term growth countries (China and Japan are examples.) These countries adopt a ‘weak money’ policy to improve export markets. The reason for this is simple if you are competing on price due to your export phase, you cannot compete on technology or product quality. In this case, a weak posture helps. Exports increase over time and the economy recovers. At the same time, the downward trend in the currency is reversing.
Many people misunderstand this long-term cause-and-effect relationship between country and currency. A strong economy has a strong currency and capital inflows help in this. A weak economy or a high inflation economy is not strengthened by artificially strengthening the currency. Such a policy is not sustainable and carries the risk of capital inflows.
India’s share of world trade fell to 0.2 per cent from 6.5 per cent in a period where trade with East Asian countries increased. The Indian rupee has been stronger than the Pakistani rupee, which has now reached Rs 705 against the dollar. This is because the management of Pakistan’s economy was poor.
The Thai baht, on the other hand, which was 10 per cent higher than the rupee in a single game, is now priced at Rs 2.50. Thailand is able to maintain its annual trade surplus even with a strong currency. After 121, India’s performance on trade and inflation improved as the Indian currency and other currencies became more market-oriented. But despite the rupee depreciating, its trade deficit remained intact. It is clear that the improvements made so far are inadequate.
If Indian politicians want a strong rupee, they will have to improve the management of the economy. Inflation has to be controlled. Productivity needs to improve. It would be wrong to spend billions of dollars from the Reserve Bank to strengthen the rupee. The fact that inflation in India has recently been higher than its key markets makes it natural that the rupee’s decline in domestic purchasing power is reflected in lower exchange rates. With the change in performance, the rupee will sustain itself without the intervention of the Reserve Bank.