When almost all the indigo-dyed TV screens and pink-coloured papers give you a hundred reasons to sink into depression after finding that the rupee has crumbled at record lows against the greenback, I wish to remind you that there’s another side to the coin. The other side is not so gloomy.
On 6th September, when rupee brushed past 72 against the US dollar the panic amongst the currency market, traders and importers were very much visible. It was indeed a record low. The media too whipped up the rhetoric as if it were the end of the world.
But before blaming the monetary policies of the government for this downslide and looking at it as an indicator of the weak Indian economy, there are a couple of points you may need to think about.
The Trump Effect
Weakness in Indian rupee is more a factor of a strong dollar rather than the rupee’s own weakness. If there is anyone to be blamed for this, it’s none other than the US President Donald Trump and weaponization of global finance by him, which in effect means blackmailing other nations through his self-centred trade policies.
Be it making attempts to manipulate Fed Policy or raging tariff-war with EU, Canada, China, India or their latest prey Turkey, Trump has left no stone unturned to assure that US dollar becomes mightier. Now, the dollar is hovering at a 14-month high against a basket of major other currencies and Trump has a reason to celebrate this strength on Twitter.
"Our Economy is doing better than ever. Money is pouring into our cherished DOLLAR like rarely before, companies’ earnings are higher than ever, inflation is low & business optimism is higher than it has ever been. For the first time in many decades, we are protecting our workers!”
Other indicators of the US economy are also helping the dollar to surge. For instance, the US economy has almost doubled its growth rate in the April-June period. Last year in the same period it grew by 2.2%, this year by 4.2%. US unemployment is at a 30-year low, in July it was at 3.9% as compared to 5% two years back. In October 2009, 10% of Americans were out of work.
Rally may continue
Now, when rupee is cheaper against the dollar it means that the FIIs (Foreign Institutional Investors) can buy more rupee for every dollar and could pump in more in the Indian equities and bond markets. Over the past one year, when Indian rupee depreciated by 14.5% against the dollar, FIIs pumped in Rs 5,600 crore in the Indian equity markets. This fuelled the benchmark indices Sensex and Nifty to rally at a new all-time high and the indices rose by 17% and 14% respectively which is a quantum jump by any standards. Also, look at the wealth of investors, its surged by more than Rupees 24 lakh crore. When weak rupee brings in more liquidity to the FIIs, one can expect the next leg of this rally to also be fuelled by them.
So, instead of cursing the monetary policy and questioning RBI's actions, it’s better to invest your money in the quality stocks of export-oriented sectors like pharmaceuticals, textiles and IT services.
Exporters get an indirect subsidy
China, the world’s largest manufacturer and exporter have consistently kept its currency weak to make their home-made products competitive as far as pricing is concerned. Now, it’s India’s turn. In the times of Trump’s tariff war, when he has already slapped more duties on Indian products, weak rupee is nothing less than our weapon against his trade war.
Although rupee’s value has depreciated by 9 rupees in a year for the exporters it means they get 9 rupees more per dollar when they sell their product overseas. In July, India’s export was at $25.77 billion. If this figure remains static and the dollar gets stronger by one rupee then this would compensate the exporters by almost Rs 2,577 crore.
Address trade deficit concerns
India’s trade deficit has soared to a 5-year high. In July, imports were up by 28.81% and exports were up by 14.32%. When exports were at $25.77 billion, imports stood at $43.79 billion. That means we are buying almost double as compared to what we sell. How long can a business sustain like this? How long can a country avoid a disaster with such imbalance? This disparity needs to be changed.
The change would remain incomplete if trade imbalance with China remains unaddressed. With $90 billion of bilateral trade, China is our biggest trade partner. With the Chinese products flooding Indian markets the trade deficit with China has trebled over the last 9 years. In 2008-09, the trade deficit with China was at $23.14 billion, in 2017-18 it rose to $62.94 billion.
Now, it can safely be assumed that expensive import with weaker rupee would discourage the importers and tilt the trade imbalance in some favour.
Last but not least, if all these good reasons fail to negate the impact of negative coverage on rupee on you, let us look back what at happened in 2013. Between May and August, rupee cracked by 22% against the dollar, when US Federal Reserve indicated the winding up of its easy monetary policy. Haven't our economy grown since then? What stops us now?
I agree that there are also some disadvantages of a weak rupee. In fact, if you follow the popular rhetoric you may realize, there are many. But the advantages weigh over the disadvantages. We should realize that certain vested interests gain from such politically driven rhetoric and cloud the holistic picture.