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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Benefits Of Strong Rupee

A weak rupee is an easy way of boosting export earnings. But as a 67-rupee-to-adollar rate in 2015 showed, exports can plunge even (SO)

Photo Credit : Shutterstock,

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.

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.”

Why is Draghi worried about a weak dollar? Because, he says, it has led to a strong euro. For deflation-hit Europe, that is unwelcome. A strong euro, Draghi contends, will “put a lid on inflation”. Surely that’s a good thing? Not for Europe. After years of low or no growth, the economies of the European Union (EU) are growing again. Draghi wants inflation to rise, prices to stabilise from stagnant levels and get the European engine, stalled for years, moving again.

Low inflation in Europe causes sclerosis. Moderate price rises are needed to boost a calcified continental economy. Hence Draghi’s prayer for a weak euro and higher inflation that will help him continue the monetary stimulus that the ECB has provided for several years following the Greek economic crisis. It is this stimulus, with the ECB printing unlimited euros to pump prime Europe’s stagnant economies, that has worked well. Most economies in the EU are now expanding, allowing Europe to kick the can of the 2014 euro crisis further down the road.

But what is sauce for Europe’s goose is not sauce for India’s gander. India for years had high inflation, high interest rates and high GDP growth. Europe has had low or zero inflation, low, zero or negative interest rates and low or zero GDP growth. The currency recipes for Europe and India are diametrically opposite.

India has for long been a victim of a “weak-currency” fetish. The country’s export lobby is strong. It clamours for a weak rupee despite the damage it causes to the trade deficit and the larger economy. Exports comprise less than 15 per cent of India’s GDP. Yet economic policy is often crafted keeping them and not the rest of the economy in mind. A weak rupee is an easy way of boosting export earnings. But as a 67-rupee-to-a-dollar rate in 2015 showed, exports can plunge even when the rupee is weak.  

India is not alone in its fetish for a weak currency. As Tokyo-based William Pesek, a former Bloomberg and Barron’s columnist, wrote in Mint: “China, India, Japan and South Korea had something truly extraordinary in common last year. Asia’s four biggest economies all saw significant currency gains. What’s peculiar, though, is the lack of panic. In years past, a 13 per cent surge in the won would’ve had Seoul throwing the full weight of the government at speculators. Far from losing its nerve, the Bank of Korea (BoK) on 30 November raised short-term interest rates for the first time since 2011. It was a sign of confidence that Korea’s growth is sound, a possible harbinger of things to come regionally. Are China, India and Japan about to follow BoK’s lead? Not anytime soon. But the tolerance in China and India of  last year’s roughly 6 per cent currency gains is reason to be optimistic about Asia’s 2018. We may be at an inflection point where the region decides that rising exchange rates can be an asset.”  

As a longtime votary of a strong rupee, I endorse Pesek’s conclusion: “It’s high time Asia took a page from, say, Germany, a high-labour-cost nation with a track record of adapting to strong currencies. Rather than bellyache, German manufacturers tend to employ that as an excuse to streamline corporate structures and raise productivity, thus boosting competitiveness. Likewise, executives from Shanghai to Seoul to Mumbai should respond to currency shifts with innovation and creativity. A rising exchange rate is, after all, a show of confidence from abroad. Optimism behind such capital flows would, over time, pull in more long-term investment, reduce bond yields and curb inflation.”

Indian policymakers, like their peers across Asia, need to recognise the power of strong currencies. But won’t cheaper imports hurt local Indian manufacturing? Not if Indian manufacturers improve productivity and quality rather than use a weak rupee as a crutch to gain greater competitiveness against imports. Currencies obviously reflect the difference in inflation between countries. But with inflation in India at reasonably low levels, it’s time to shed old fears over a strong rupee.




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