[Editorial Analysis] Rupee and reform

Exports apart, the Modi government should not lose sight of the need to maintain macroeconomic stability.

Mains Paper: 3 | Economic Development

Prelims level: REER, EME

Mains level: Decreasing value of rupee against the dollar is not a good sign for India’s economy.

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Context:

• On Tuesday, the rupee briefly breached the 70-to-the-dollar mark before closing at Rs 69.89.

• The rupee has been Asia’s worst-performing currency, there are reasons not to be overly perturbed.

• The current slide has mainly to do with the turmoil in Turkey, which has weighed on not just the rupee, but most emerging market economy (EME) currencies.

• Today’s global scenario — of rising US interest rates and monetary policy tightening by major central banks, elevated oil prices, and mounting trade tensions.

• The RBI cannot intervene much to defend the rupee in these circumstances.

• Nor should it try to, having already seen its foreign exchange reserves deplete by over $21.8 billion since end-March.

What are the current scenarios?

• The rupee’s recent fall, to that extent, corrects for overvaluation.

• While there are many who view a strong currency as synonymous with national pride, the fact is this is least helpful if it hurts the country’s trade competitiveness.

• With its current account deficit widening from $15.3 billion in 2016-17 to $48.7 billion in 2017-18, and a likely $75 billion-plus this fiscal, India needs a focused strategy for boosting exports.

Conclusion

• In episodes of global selloff such as the present one, countries with low inflation and control over twin deficits are less prone to capital flight and currency run.

• They are also more likely to benefit from inflows when the storm has passed. Equally important is not to resort to protectionism.

• The Modi government’s record here is far from inspiring.

• This again betrays weakness, panic and faintheartedness — when strength, confidence and commitment to reforms is what matters to global investors.

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