Asserting that the rupee slide was a good sign for India, Assocham today said the country must allow the currency to depreciate to help exports remain competitive.
“Any depreciation in rupee on account of China-led turmoil in the global financial markets should only be a welcome sign for India; else Indian exports will suffer more at the hands of China and other emerging countries witnessing correction in their currencies.
“India should allow its currency to slide while the RBI should use ample foreign exchange reserves to defend the currency only if there is a rout situation. However, there is a distinct possibility that rupee could actually strengthen over the medium term,” the chamber said.
The rupee dipped by 30 paise to a fresh 28-month low of 67.59 on Friday due to fresh dollar demand from importers in view of persistent foreign capital outflows amid sharp fall in equities.
The Finance Ministry had said along with the Reserve Bank it was keeping a close watch on the currency movement and asserted that the current account deficit will remain well under control.
Assocham said India must ensure that its exports get back their competitiveness even in the midst of global slowdown.
The major challenge, it noted, is coming from China in various forms with sizeable influence on the currency valuation.
Yuan devaluation, third in the last five months, will negatively impact Indian firms which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade, the chamber said.
“The biggest concern is the steadily deteriorating balance on the merchandise trade account with China,” Assocham President Sunil Kanoria said.
In 2014-15, bilateral trade between the two countries stood at $72.3 billion with the trade gap at $49 billion. The government and the Indian industry have time and again raised concerns about the widening deficit.
Earlier this month, China’s central bank had devalued its currency by 0.51 per cent to 6.5646 per cent against the dollar, the lowest since March 2011.
“The latest round of devaluation can make India’s trade imbalance with China even worse. In any case, the deterioration has been rather steady and secular in the last few years with exports to China dropping,” the chamber said.
“Going forward, the situation does not look good; rather it has deteriorated with the Chinese demand for primary goods declining and crash in prices,” it added.