New Delhi: India’s strongest currency has become a threat to its growth aspirations, piling up pressure on the central bank to aggressively intervene in the currency market, even at the risk of incurring US wrath.
The rupiah has risen more than 6 percent this year against the dollar, breaking six consecutive years of depreciation, with the impact magnified by the decline in many currencies against the dollar in the same period.
That is weighing on an economy struggling to cope with the disruption caused by the ambiguous rules of a recently released tax on goods and services (GST), and still has to fully recover from the repression of Prime Minister Narendra Modi in ” black money “.
While the rupiah wave is being driven by strong inflows of capital attracted by India’s economic and political stability, it is making the country’s exports less competitive and is also boosting imports, prolonging a drop in manufacturing.
The slowdown in exports affected GDP growth by 2.6 percentage points in the last quarter. General economic expansion cooled to 5.7 percent in the June quarter, according to data released Thursday, its slowest pace in more than three years.
“The rupee is now harming growth,” said Pronab Sen, the former head of statistics for India and now director of a research center for the International Growth Center. “It is time for India to do something about it, otherwise we will have to prepare for an extended period of weak growth.”
HAND FOCUS
Previously, the strong appreciation of the rupee would lead politicians to talk about the currency. But that has been absent under Modi since many of his cabinet colleagues are willing to project the growing rupee as a backing of the Indian leader’s economic management.
But with the slowdown in export earnings threatening jobs and double-digit import growth, it eliminates Modi’s “Make in India” program, some officials are calling for action.
In its mid-year economic survey, the Finance Ministry last month cited exchange rate appreciation as one of the downside risks for Asia’s third largest economy.
Thursday’s GDP figures have only reinforced those concerns.
“A call should be made sooner rather than later if the economy can pay the rupiah at these levels,” said a senior government official.
FIGHTING EXPORTERS
Indian politicians were betting on improving the global economy to raise demand for Indian goods, helping to improve levels of capacity utilization in Indian factories, which are running almost 30 percent below capacity
However, those hopes have been belied as commodity export growth plunged to 3.9 percent year-on-year, up from 28 percent in March.
While overseas shipments have been damaged by the growing protectionism and uncertainty created by the GST, a stronger rupee has not helped the cause either.
The Indian currency appreciated 4 percent against the dollar during the last quarter, while the Chinese yuan and the Malaysian ringgit depreciated by 1.9 percent and 2.9 percent, respectively.
Ajay Sahai, director of the Federation of Indigenous Export Organizations (FIEO), said that this price differential of almost 6 percentage points made it more difficult to compete with Chinese exporters in unbranded segments such as tiles, leather, and clothing.
“This price gap is good enough for a company like Wal-Mart to shift orders to other places,” Sahai said.
Exports of services – a strength of the Indian economy thanks to the success of outsourcing companies like Infosys Ltd and Tata Consultancy Services – are more vulnerable to the rise of the rupee.
In a recent report, citing a report from the Reserve Bank of India (RBI), DBS Bank said that each 1 percent increase in the rupee would affect the bottom line of information technology and outsourcing companies in up to 40 basis points.
NO EASY OPTIONS
The Central Bank has so far limited its interventions in the foreign exchange markets to efforts aimed at minimizing volatility rather than limiting the currency.
But floating capital flows are not only putting pressure on the rupee, they are also unloading financial markets with excess liquidity, which could pose challenges for policy monetary policy of the central bank. With inflation below its medium-term target, the RBI could seek to reduce interest rates to prevent further appreciation of the currency. It could also aggressively hedge the rupiah by buying dollars to build foreign exchange reserves. Such measures, however, could complicate the management of RBI inflation and potentially also put India on Washington’s list of currencies. The United States Treasury is required by law to initiate special currency talks with any country that has “significant” current accounts and “significant” trade surpluses, as well as a persistent and unilateral intervention in the currency markets. If a country meets two of the three conditions, will be included in the monitoring list. In
