The value of the Indian rupee relative to other world’s currencies, in particular the U.S. Dollar, and to a lesser extent the British Pound and the Euro has always been a source of worry / consternation to the Indian Public.
We frequently see articles talking about the “slide” of the rupee as compared to the Dollar, and the “depreciation” of the rupee. It’s a political hot button topic as well, with political parties having to release statements to calm public sentiments on this issue.
There are also several ways the Indian Central Bank (RBI) tried to stop this slide:
- Holding vast reserves of U.S. Dollars ($597 Billion) and selling U.S. Dollars and Buying Indian Rupees to increase the demand for Rupees.
- Controlling the purchase, sale and other dealings in foreign exchange. I.e. any inflows and outflows of non-Indian currencies by Indian residents or companies require approvals from the RBI.
- Strict disclosure requirements on foreign currency holdings by Indian residents / companies
But, if we tried to ask ourselves the important question, why does we even care about the price of the Rupee relative to the Dollar? Does it even matter?
As of today, yes it does.
India still imports a huge amount of goods and services ($394 Billion in 2020), particularly Oil and Natural Gas imports which were $119 Billion in FY 22 (i.e. 30% of all imports).
When we such significant imports, when 1 Rupee can buy less goods from abroad due to a sliding exchange rate, this hurts the regular consumer. Costs of goods produced using imports goes up, particularly fuel costs.
Can we change this trend?
First, we need to reduce imports
Imagine an India which achieves self sufficiency in our energy and other import needs by:
- Transition to renewable energy phasing out Coal, Oil and Natural Gas power plants and use of Solar, Wind and Hydroelectric energy
- Transition to Electric vehicles for individual and public transportation
- Encouraging domestic industry and intellectual property to replace foreign imports of machinery, chemicals, electronics and other equipments that are currently being imported.
Second, we need to vastly increase exports.
Although India has had reasonable success in IT exports with $254 Billion of IT services exported in FY22, we are lagging behind in manufacturing exports given the size of our economy and working population
(To give you some context, India did $420 Billion of merchandise exports in FY22 whereas China exported $3.36 Trillion !! Which is 8 times India’s exports)
- Encouraging through tax incentives, land and other incentives, export oriented businesses
- Improving productivity of labor intensive businesses through technology and vocational education, to better compete globally
- Having a “Marshall Plan” to ramp up key infrastructure including Ports, Highways, Airports, Inland waterways and Rail Freight Corridors.
(To give you some context of the Infrastructure challenge, India’s biggest port by volume is the Mundra Port, with a capacity of 6.6 Million TEU’s (Twenty Foot Equivalent), whereas China’s largest port, the Port of Shanghai is capable of Handling 38 Million TEU’s , i.e. 5.7 times. In fact, of the world’s top 10 ports, none of them are in India, whereas China has 7 of the Top 10 ports. It’s a simple case of if we build the port capacity, it will get filled up as long as we create the incentives to do so)
Once we do all these things, which I admit are not easy, my question is that do we need to maintain such strict control on the Rupee?
Or can we allow it to devalue to encourage exports?
Japan and Korea are industrialised and developed economies with devalued currencies. In fact with 1 USD, you can buy 1,278 Korean Won or 129 Yen.
