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ET EDIT-No Lower Rupee Route to Export Growth

September 23, 2019 06:38 AM


No Lower Rupee Route to Export Growth
Many attribute tepid Indian export growth to an overvalued rupee, which has risen almost 20% in trade-weighted terms in recent years, and suggest that the RBI intervene in forex markets to cheapen the rupee. This could be done by buying dollars massively, but that would mean a corresponding injection of rupees into the money supply. In theory, this could be sterlisied by open market operations. That is indeed the strategy that India adopted from the mid-1990s to 2008, and Indian exports boomed in that period, say advocates of depreciation. However, studies like those of C Rangarajan and P Mishra suggest that exports are sensitive not so much to the exchange rate as to global economic conditions.

But can India go back to those days of easy exchange rate management? No, because trading in the rupee has now become much bigger in foreign markets than in India itself. The Financial Times recently reported that London had become the biggest market for the rupee, with a daily turnover of almost $50 billion, up from less than $10 billion in 2016. In the same period, trading volume in India’s forex market rose from around $30 billion to $35 billion. Trading volume in Singapore is now close to $20 billion, and is well above $10 billion a day in the US and Hong Kong. In the old days rupee trading volumes abroad were tiny and the RBI could influence the rupee’s level. Indeed, the RBI could sometimes achieve its aim by simply frowning at and threatening forex players.

But now the RBI can, at best, intervene to iron out extreme fluctuations. It could curb inflows of dollars but that would further weaken the bond market. The way to revive export growth is to reduce the cost of land, capital, labour, electricity, freight and imported inputs through rational policy

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