The Dollar Debate!

There is one thing commoners miss while reading currency fluctuations. It is that they are dealing with two variables. It is not the rupee that is weakening, but it is the dollar that is appreciating. Let me illustrate:

About 5 years ago 1 Great Britain Pound equalled about 101 rupees. Now, it is worth only 89 rupees. One Euro bought about 85 rupees, now it buys only 79 rupees. A Brazilian real equalled about 26 rupees and now it is about 18 rupees. A Russian rouble equalled 2 rupees back then and now it is on par with the rupee.

In short, the rupee was getting stronger over the past few years against many other currencies and that was worrisome to many economists and exporters. In fact, not long ago publications that are highly critical of the BJP like ‘the Wire’, etc., were complaining that the Indian government was keeping the rupee too high. (https://thewire.in/banking/rising-real-exchange-rate-hurts-indias-exports)

This is one of the reasons why RBI has slowly let rupee weaken so that the exporters don’t lose out to their competitors abroad. Since inflation is not a worry now, they are more comfortable doing this. Many economists are asking the RBI to go even further. India’s rupee is currently overvalued by 5-7% despite the currency shedding close to 7% against the dollar this year.

The primary reason for US currency growing stronger is that the US Federal reserve has increased its interest rate in mid June and signalled a willingness to increase interest rate. This is the first in 10 years that interest rates are increasing in the US. When interest rate increases, more money gets into that country (higher interest rate makes the market attractive to investors) and thus a lot of money has quit emerging markets to get into the US. This has crashed a lot of currencies including India’s.

A weak currency would increase prices (due to inflation) especially those you import. On the other hand, a strong currency would reduce jobs — as many export industries (such as IT, Jewellery, textiles) would suffer and imports would start replacing many homegrown companies (toys, electronics from other countries would be cheaper than local products).

In short, currency question is a question of inflation vs jobs. For a while the government and RBI were more concerned about inflation and thus pushed for a stronger currency. As job growth suffered they had to balance it now.

There is also a question of getting exports to get on par with imports. For a long time we have been importing more than we export and you can think of that as akin to borrowing money when you are spending more than you earn. This cannot go on forever. We have to get to a balance by weakening currency where the import starts reducing (as price of import increases, people cut down on purchases — such as taking fuel efficient transportation modes, skipping a phone upgrade etc) while exports start increasing eventually to a point of them becoming equal.

I think there is some more distance to go and RBI is letting Rupee find its real value.