The rupee has risen more than 6 percent
this year against the dollar, snapping six consecutive years of depreciation,
with the impact magnified by the decline of many competitors’ currencies
against the greenback over the same period.
That is weighing on an economy that is
struggling to cope with disruption caused by ambiguous rules of a recently
launched Goods and Services Tax (GST), and has yet to fully recover from Prime
Minister Narendra Modi’s crackdown on “black money”.
While the rupee’s surge is being driven by
strong capital inflows lured by India’s economic and political stability, it is
making the country’s exports less competitive and is also driving up imports,
prolonging a slump in manufacturing.
An exports slowdown dented GDP growth by
2.6 percentage points in the last quarter. Overall economic expansion cooled to
5.7 percent in the June quarter, data
released on Thursday showed, its slackest pace in more than three years.
“(The) rupee is now really hurting growth,”
said Pronab Sen, the former Chief Statistician of India and now a country
director for think-tank International Growth Center. “It is about time India
does something about it, else we will have to brace ourselves for an extended
spell of weak growth.”
Previously, strong rupee appreciation would
prompt policymakers to talk down the currency. But that has been absent under
Modi, as many of his cabinet colleagues are keen to project the rising rupee as
an endorsement of the Indian leader’s economic stewardship.
But with slowing export earnings
threatening jobs and double-digit imports growth hollowing out Modi’s signature
‘Make in India’ program, some officials are calling for action.
An India Rupee note is seen in this illustration photo June 1, 2017. Reuters
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
“A call will have to be made sooner rather
than later whether the economy can afford the rupee at these levels,” said a
senior government official.
Indian policymakers were banking on an
improving global economy to lift demand for Indian goods, helping improve
capacity utilisation levels at Indian factories, which are running nearly 30
percent below their capacity
Those hopes, however, have been belied as
merchandise exports growth has slumped to 3.9 percent year-on-year from near 28
percent growth in March.
While overseas shipments have been hurt by
rising protectionism and the 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, whereas the Chinese yuan and
Malaysian ringgit depreciated by 1.9 percent and 2.9 percent, respectively.
Ajay Sahai, head of the Federation of
Indian Export Organizations (FIEO), says this price differential of nearly 6
percentage points made it tougher to compete with Chinese exporters in
non-branded segments such as tiles, leather and garments.
“This price gap is good enough for a
company like Wal-Mart to shift its orders to other locations,” Sahai said.
A roadside currency exchange vendor counts 10 Indian rupee banknotes in Kolkata, India, November 9, 2016. Reuters
Service exports – a strength of the Indian
economy thanks to the success of outsourcing firms such as Infosys Ltd and Tata
Consultancy Services – are more vulnerable to the rupee’s rise.
In a recent report, citing a report by the
Reserve Bank of India (RBI), DBS Bank said every 1 percent rise in the rupee
would affect the bottom-line of information-technology and outsourcing
companies by as much as 40 basis points.
No easy options
The central bank has so far confined its
interventions in the foreign exchange markets to efforts aimed at minimising
volatility rather than capping the currency.
But buoyant capital flows are not only
putting appreciation pressure on the rupee, they are also flushing the
financial markets with excess liquidity, which could pose challenges for the
central bank’s monetary policy.
With inflation way below its medium-term
target, the RBI could look to cut interest rates to prevent further currency
appreciation. It could also aggressively cap the rupee by buying dollars to
build foreign exchange reserves.
Such measures, however, could complicate
the RBI’s inflation management and potentially also put India on Washington’s
The US Treasury is mandated by law to
initiate special currency talks with any country that has “material” current
account and “significant” bilateral trade surpluses, and persistent, one-sided
intervention in foreign exchange markets.
If a country meets two of the three
conditions, it will be put on the monitoring list. India already runs a trade
surplus of more than $20 billion with the United States.
The South Asian nation is currently not on
the monitoring list, but President Donald Trump has ordered an investigation
into the causes of the US trade deficit with 12 of its trade partners,
“There are no easy options,” said the