Standing firm on its stance, the Reserve Bank of India (RBI) has turned down the Commerce Ministry’s request to consider devaluation of the rupee to help exporters compete in countries which have been devaluing their currency.
In a letter to the central bank, the Ministry had argued that devaluation would help exporters compete with countries such as China, Japan, Egypt and Brazil which have been devaluing their currency. But the RBI is against this, stating that the rupee is close to its normal value and should not be tinkered with.
“Ideally, we agree with the RBI. Our currency is just slightly overvalued. But, countries world over are devaluing their currency and their exporters are gaining in competitiveness solely on account of this,” a Commerce Ministry official told
India’s exports have been declining for 15 consecutive months. Exports for fiscal 2015-16 are $261.13 billion, which is much lower than the previous fiscal’s $310 billion and $314 billion in 2013-14.
Recently, Commerce and Industry Minister Nirmala Sitharaman told BusinessLine that while the positive impact of Foreign Trade Policy, which included the Merchandise Exports from India Scheme (MEIS) and an interest subvention plan, is being noticed, it was the volatility in exchange rates that was hitting exporters’ performance.
“The problem is that I may follow a certain fiscal policy in India, but I don’t have control over what other countries are doing. For instance, if Russia, devalues its currency sharply, the price of my product will go up in the market. If Brazil too devalues its currency, and it is my competitor in the Russian market for two categories of products, then I may not be competitive there any more, and the Brazilians can sustain themselves,” the Commerce Ministry official argued.
Survey’s cautionThe Economic Survey 2015-16 said that India should resist calls to seek recourse in protectionist measures, especially in relation to items that could undermine the competitiveness of downstream firms and industries.
India, according to the Survey, could respond in three ways – First, the most effective instrument to respond to threats to overall competitiveness is the exchange rate. Second, India should strengthen procedures that allow WTO-consistent actions, and third India should eliminate all the policies that currently provide negative protection for Indian manufacturing and favour foreign manufacturing.
“The rupee’s value must be fair, avoiding strengthening. This can be achieved through some combination of monetary relaxation, allowing gradual declines in the rupee if capital flows are weak, intervention in foreign exchange markets if inflows are robust, and being cautious about any further opening to inflows that could unduly strengthen the rupee,” it noted. China has devalued the yuan by 4.4 per cent in 2015, after a decade of strengthening. It carried out a second round of devaluation in January this year and again in February.
According to a report by Hong-Kong based equity broker CLSA, the yuan will tumble 19 per cent by the end of 2017 as depletion in foreign-exchange reserves has forced policy makers to let investors set the value of the currency.
Most policy watchers view China’s currency devaluation largely as an attempt to increase the competitiveness of its exports.