Why 72-73 may be the fair value of the rupee

We should not see a strong rupee as strength but target a fairly priced rupee for restoring our competitiveness, says Rashesh Shah.

Illustration: Uttam Ghosh/Rediff.com

While the recent fall of the rupee against the dollar has raised concerns, the moot point here is - has the rupee really fallen.

Leave aside the dollar, which has strengthened against every currency in the last few months, as rightly pointed out by Finance Minister Arun Jaitley, the rupee has maintained a favourable situation against almost all other currencies in the last five years.

Take the rupee versus the pound (see chart). It was 100.20 on September 10, 2013, and was 93.70 on September 10, 2018.

The Chinese yuan and the Japanese yen are almost at the same level during this period and the euro is also at a lower level in 2018 than 84.60 in 2013.

The Indonesian rupiah and the Brazilian real, currencies from the emerging world, are substantially down today as compared to 2013.

Is there a need to panic, therefore, on account of the rupee’s fall against the dollar?

Finance Minister Arun Jaitley is bang on target when he says that it is mainly because of the external reasons - the US policies leading to flow of dollars into the country, forced shortage of oil that has led to crude price rise putting pressure on India, and then trade war between the US and China that has resulted in devaluation of its currency by the later - all these factors have contributed to the rupee breaching the 72-a-dollar-mark.

There is not much that India can do on these counts rather than adopting a wait and watch policy.

Yes, if there is an unreasonable movement, like the one witnessed currently, the government must take stock with the Reserve Bank of India (RBI) and see if there is any immediate intervention required.

As far as oil prices are concerned, till the time it remains within the $60-80 range, there is no reason to worry, but once it crosses $80, which it is threatening to currently, the government will have to look at measures to cushion its impact on inflation and economy.

The good news is that the current spike in the oil prices may not last long and best that can happen here is that it goes down below $60 in the next few months, or sometime next year.

For now, therefore, the more important fact here is to ensure that the rupee is fairly priced, which is one of the most important factors to keep India competitive in the global marketplace.

This may be the benchmark in any RBI-government talks on deciding the steps to handle the rupee volatility and its fall against the dollar.

72-73 may be the fair value of the rupee

In this backdrop, 72-73 may be the right value of the rupee to a dollar to ensure competitiveness.

I did talk about this last year in February and the proposition provides a reasonable framework to look at the current state of rupee movement today.

We should not see a strong rupee as strength but target a fairly priced rupee for restoring our competitiveness.

We didn’t depreciate while all other currencies have. The rupee has been fairly stable in the last four years prior to the fall this year.

When the inflation has averaged 4-5 per cent in the last few years, the rupee needed to depreciate 7-8 per cent to remain competitive.

Once we are settled with the rupee at 72-73 a dollar, the government and the RBI can attune fiscal and monetary policies, respectively, according to that instead of groping in the dark about the strengthening of the rupee.

It is good that the government and the RBI together are maintaining a strong vigil on the rupee movements, but with the economic revival gaining ground and inflation at manageable levels, it is better to avoid any knee-jerk reaction.

The dollar may only strengthen from here, and the options are limited

Thanks to the rising US interest rates, the dollar is expected to only strengthen further against the emerging market currencies this year and we should be prepared for this.

Any relief on the oil prices front could be a mitigating factor here as the scope for taking measures to curb the fall of the rupee is severely constrained.

The only way to fight this fall against the dollar is either raise the interest rates, and already the talks have emerged on this count, which we cannot afford at this stage of recovery as it will be detrimental to the strengthening revival of animal spirits in the economy; or to use up the forex reserves, which, again, may not be prudent, though the RBI will be under pressure to take this route.

The apex bank will have to avoid this mode as it has done in the past.

Learning to live with the current level of the rupee would be a more realistic way of dealing with the fall that is a boon rather than a bane.

A competitive export and import milieu for the Indian industry will ultimately benefit trade and, in turn, provide a much better platform for growth in the coming years.

The rupee has to be at the right levels if the Indian economy has to grow around 8-10 per cent in a sustained manner.

Rashesh Shah is president, FICCI