Rupee nearing 80? Swaminathan Aiyar on why we shouldn’t worry too much

The latest projections of the IMF, even with the downward revisions is still showing India as being the fastest growing economy. When everybody else is going down, let us not pretend that we can become a 10% economy. If we can do 7% or even 6.5% in this kind of atmosphere, we are doing pretty well,” says Swaminathan Aiyar, Consulting Editor, ET Now.

You wrote an article recently that even if the rupee touches 80, it should not be a great concern. One would wonder why a weak rupee even becomes a political issue? It is seen as representative of an economy that is weakening, isn’t that the case?
I regret to say that it can have political implications. There are people who see the exchange rate as some kind of virile masculinity symbol. I am afraid it is nothing of the sort. The exchange rate needs to be competitive. That is the main point. The question is not whether it is high, low or where it should be, the question is where are your competitors and are you competitive with them.

So the target should not be in terms of an absolute number. The target should not even necessarily be against the dollar. One has to see what the competing countries are. Most of the countries we are competing against are developing countries. One should look at the RBI’s 40-currency basket. The rupee is depreciating and so is everybody else! The rupee has depreciated less than some of the other currencies against the dollar.

We should not just be measuring ourselves against the dollar, we should be looking over our shoulder to all those 40 currencies. and if you look there, the rupee is not too weak. If anything, the rupee is too strong. So the Reserve Bank needs to manage a gradual downward float of the rupee keeping in mind competitiveness. Forget about the absolute level, the absolute level may ultimately settle at 75 and after all this is over, we may strengthen again because the dollar weakens.

On the other hand, if you get a situation where the price of oil goes to $170 a barrel, maybe we will go all the way to Rs 90 to the dollar. It depends on what the external situation is. There should be no fixed targets. The key issue is to make the exchange rate competitive.
As you said ,the rupee versus the dollar is linked to the virility of the Indian economy. Isn’t it true that we are going through this patch of a weak rupee because FIIs are pulling out of Indian equities at a frightening pace; the trade balance is widening? Isn’t the rupee weakening for all these inherent issues in the economy?
Yes but it is not an Indian issue. It is across the whole world. The rupee is weakening, yes. So is the yuan, so is the Thai baht, so is the Indonesian rupiah – all the others. Why? We are in difficult times for a number of reasons including the Ukraine war, including probably tensions with China and the after effects of Covid.

With all this, the dollar is now a safe haven. So a large number of people are going to the dollar as a safe haven. On top of that, the Fed is raising interest rates. When the Fed raises interest rates, it is becoming attractive just in terms of yield for money to move out of riskier emerging markets back into the dollar. So what we are seeing is not so much the rupee weakening as the dollar strengthening. So do not focus on the dollar now. In the long run, it may turn out that it has been an over correction. It is possible that after all this settles down and there is an end to the Ukraine war within three months, I can see a possibility of the rupee strengthening back to 76.

But we do not know right now. There is some weakness in India as there is in the whole world economy. The IMF, the World Bank are all lowering their projections of world growth. So yes, everybody is getting weaker and there is no doubt about it. Within that, India is relatively well off compared to most others. If you see the latest projections of the IMF, even with the downward revisions that you are seeing, it is still showing India as being the fastest growing economy. When everybody else is going down, let us not pretend that we can become a 10% economy. If we can do 7% or even 6.5% in this kind of atmosphere, we are doing pretty well.

You have talked about how the rupee should be allowed to depreciate even further but it does hurt some parts of the economy. It hurts those who are importing. It hurts students who want to go abroad. It hurts tourists. Should this matter when policy is being formulated?
No it obviously hurts. Let us be clear there is a global crisis. This global crisis combination of Covid, the Ukraine war and now high inflation the world over means everywhere people are saying money has been too loose and everybody has to tighten. We are very clear that pain is going to be there. The pain is global and the pain is inescapable. All that you can do is manage this in an orderly fashion.

We do not want to be like Argentina or Turkey and suddenly have a huge deprecation of 17-20% which in turn would then mean if import prices go up so much, then inflation gets even worse. India unfortunately has a relatively high inflation rate compared with many of our own competitors. On the other hand, if you look at Europe and the USA, inflation is over 8% in the USA, getting to 10% in parts of Europe. Comparatively, we are not looking that bad. Our GDP deflator maybe 10-11% right now and we are traditionally a high inflation country, compared to the others but currently we are not doing that badly compared to the other people. So there is going to be pain and the pain is inescapable. But I do not think it is going to be more severe than what you will see elsewhere.

This article was originally published in Economic Times on July 1, 2022.

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