Sep 4, 2015

The case for a weaker rupee

I believe there is a good case for a weaker Rupee. It is not about just following the fashion. China has devalued its currency recently, and before that Japan had done so, and there were doubts that Euro's quantitive easing was a proxy for weakening Euro. The method adopted to devalue the currencies might be different; direct intervention, bond buying or quantitive easing, but the end effect is a weak currency. India needs to evaluate the options now. 

India's merchandise trade deficit has hovered constant around 180 billion dollars for around four years now. The gap is filled partly by earnings from services sector and partly through the foreign inflows. A bare reading of only current account deficit indicates that we have room for a devalued currency. If we are targeting to have better export performance, we need to go with a weaker Rupee. There might be a lag, but it should work, given international experience.

Krugman has written an article in NYT here. He talks about what can be learnt from Dollars of different nations. When talking about currency depreciation, he has this to offer:

...we learn that what right-wingers call currency “debasement” — a decline in a currency’s value in terms of other currencies — can be a very good thing. Canada was able to combine spending cuts with strong growth in the 1990s because exports were raised by the depreciation of the loonie. Australia rode through the Asian financial crisis of 1997-98 with little damage thanks largely to a falling Aussie...

That should give us a strong cue to consider Rupee depreciation. And as Krugman rightly mentions, the right-wingers somehow attach their ego to the currency value. When Rupee depreciates, there are howls of protest. There is nothing sacrosanct about the value of the currency. If Rupee is 70 or 75 to a  dollar, it's just a number that we need to get used to. The effect of the value is something that we need to focus upon. And given that international experience has traditionally proven that a weaker currency is good for exports, that should seal the case. 

The issue regarding competitive devaluation, that is, what if everyone around does so, given that the entire world is not pegged to any standard value (say Gold), is moot. Such competitive behaviour might doom the entire world. However, that doesn't justify not moving first.