Why Rising Rupee shouldn't be a Cause of Concern?

A lot has been said and written about rupee appreciating significantly against the dollar in the last few months, from the highs of 46 to a dollar it is presently being traded at 40.5Rs.

While proponents favoring this rise attribute it to weakening dollar vis-à-vis other currencies, rise in the trading capacity of our country, less demand of dollar in the primary market and solid indicators conveying a improved economy (Last week was very significant in this- The market value of total stocks in BSE crossed 1 trillion dollar-again a result of appreciating rupee and very proudly India now belongs in the trillion dollar GDP club).

Opponents of this foresee a death knell for Indian Export Industry, compounding of problems for Indian software services which they feel will loose out on their competitive advantage.

Some questions to ponder:-

What does the government do to counter this? Is this beneficial? Is the scare raised by certain quarters regarding the threat for real?

To answer these let us first understand why the rupee rose so significantly?

The reason for India’s burgeoning forex reserve(in excess of 220billion dollars) is due to vast amount of direct FDI inflow in the country, increase in the remittances by NRI’s, On top of that to counter inflation, dry the liquidity and to prevent overheating of economy the government raised the savings rate hence even large corporate and foreign governments started parking their surplus funds in our country-This creates an imbalance between demand and supply of dollar hence the Rupee started appreciating phenomenally.

So where does Exports fit into this maze of finance and economics-Over the years Exports just like reservation has become a favorite duck of successive governments, Strong exporters lobby has forced governments to go all out to protect something which does not help in improving collections of direct taxes (Tax deduction of 100 percent is offered on Export Profits) - Despite all the favors meted out to this industry we still have an trade deficit of over 50 billion dollars.

Economist estimates that if we remove the artificial inflation of rupee the rupee still can smartly trade at 30-35Rs- Remember Rupee was devalued to bring dollars into the country and make our exports competitive during the Narsimha Rao regime. Its been more than 15 years Exporters by now should have learnt how to tame the volatility in the market!

After exporter bashing the next line of thought would be- How would appreciating rupee really help us?

Appreciating Rupee would make our imports cheaper-India imports over 70 percent of its crude oil requirement - a reduced amount of oil bill will make the cost of energy cheaper- Food for thought- India is fast becoming an extensive energy dependent economy, reduced energy and transportation cost would make goods and services more cheaper providing larger access to it, increasing the demand and thus proving it beneficial by economies of scale-A cheaper dollar would also help our emerging tourist class to visit more offshore places, and they can also get some good Spirits that I’ve been looking for at cheaper rates ;-)

Exporters would be crying hoarse after reading this- Agreed I don’t have panacea for their misery,

Some suggested solution that I see helping them come out of self inflected pain

Don’t compete on pure cost advantage rather move higher up in the value chain.
Don’t try and force our governments to adapt policies akin to China instead emulate progressive trade practices of Korea,Japan or Taiwan(value of Taiwanese Dollar is close to 33Rs and its an export surplus country)
Exporters can also alter the way Software services are conducting their business, by smartly hedging their risk, by trading in other currencies largely Pound sterling and Euro.

I’m sure the prodigious trio of Honorable Prime minister Mr. Manmohan Singh, Planning commission chairman Mr. Montek Singh Ahluwalia and our very own Finance minister P.C Chidambaram are stalwarts in this area (I revere them) along with Reserve bank governor Y.V Reddy can bring about some quick fix solution as well as long term radical changes in the way money is being handled and perceived in this country.

Psst Psst- The views/Ideas/Opinions expressed in this context are completely of the writer. It might be a bit boring to read but I endorse this view in its entirety. I do not vouch for completeness and usefulness of this in any form-however opinions and feedbacks of others are most welcome.