Benefits Of Strong Rupee

OVER THE PAST SIX months, the Indian rupee has appreciated by nearly seven per cent against the US dollar. According to conventional wisdom, exports should have fallen. In recent months, the opposite has happened. Exports had begun sliding from 2015 when the rupee was around 66-67 to the US dollar. Today, with the rupee having strengthened to 63-64 a dollar, exports have, against conventional wisdom, picked up.

- Minhaz Merchant

Obviously macro-economic factors have played an important part in India’s poor export performance over the past three years. But it’s clear that a strong rupee is not necessarily an impediment to higher exports nor is a weak rupee a guarantee for higher exports. Apart from the state of the global economy, oil prices and macro-economic indicators, domestic productivity plays a large part in boosting export growth.

A strong rupee has several advantages. First, it moderates inflation. Second, it lowers the cost of imports. For a country with a large trade deficit, running at over $150 billion (Rs 9.60 lakh crore) annually, a strong rupee is a boon, not a bane. Oil prices are climbing upwards of $70 a barrel. Gold has stabilised at over Rs 30,000 for 10 gms. These two commodities form the bulk of India’s import bill. The country imports 82 per cent of its crude oil. Gold remains a major attraction for households as a hedge against inflation.

India’s trade deficit is unlikely to dip soon. The government’s push to switch to electric cars and buses by 2030 will help reduce India’s dependence on oil imports in the long term. But as British economist John Maynard Keynes said, in the long term we are all dead.

The right level of currencies has lately become a contentious issue globally. US President Donald Trump has been accused of “talking down” the dollar, saying it will help US trade. The head of the powerful European Central Bank (ECB), Mario Draghi, said recently: “When someone says that a good exchange rate is good for exporters and good for the economy, that means (he is) targeting the exchange rate.”