What is the issue?
- The rupee has hit historic lows against the dollar in recent weeks.
- It is not a huge concern, but needs a well thought-out strategy for response.
Why is it not a concern?
- India's external accounts look far more secure.
- This is primarily because the foreign exchange reserves are in the comfort zone.
- They had dipped below $300 billion in 2012-13, but in 2017-18 they were $424 billion.
- The current account deficit, too, remains manageable.
- It is true that the long low in commodity prices is over.
- E.g. Fuel prices are in a rising trend.
What are the proposed risks?
- The prospect of a trade war is seen as disruptive.
- The merchandise trade deficit has been adequately compensated for.
- This is in part by payments for services and remittances as well as strong capital inflows.
- However, there has been concern expressed about all those components as well.
- E.g. threat of visa restrictions by the US administration could affect IT services revenue.
- But the revenue from IT and ITeS has been range-bound around $70 billion.
- Also, rising crude oil prices mean that remittances from the Gulf have rebounded as well.
- These fundamentals of the macro-economy appear to be strong, ruling out the risks.
What should India be prepared for?
- Certainly, there will be increased inflationary risks.
- The monetary policy committee of the RBI thus may be more willing to raise interest rates.
- This might in turn hamper the nascent growth recovery.
- In the short run, the trade deficit will also find it difficult to respond to a depreciating rupee.
- Despite this, much of India imports, including fuel and electronics, will not be easy to substitute.
What lies ahead for India?
- Indian rupee's depreciation is similar to what is happening with many emerging market currencies.
- However, the consequences of rupee depreciation need a careful handling.
- This is because, rupee depreciation is an opportunity that must not be wasted.
- India must increase self-reliance, one way, by further indigenising India's fuel mix.
- The government's large-scale renewable energy push should be seen as part of this effort.
- A sustainable external account would require sustained increases in the competitiveness of Indian exports.
- This requires domestic structural reform, which is also crucial for genuine macroeconomic stability.
Source: Business Standard
