Will NDA double buying power of the rupee?

Will NDA double buying power of the rupee?

By Gautam Mukherjee | 22 April, 2017
NDA, power of the rupee, economic circumstance, foreign institutional investment, GDP, Commerce Minister Nirmala Sitharaman, GST, BJP, US dollar, US Federal Reserve, UNSC, devaluations
The prescient thinking is that we might be moving eventually towards Rs 30 to the US dollar, at less than half of the exchange rate today.

A country’s economy gets -reflected through its currency.

 -Nirmala Sitharaman

Yes, that’s right, gradual revaluation is on the cards now, not just as economic circumstance, but as policy. The main reason for this may be the enhanced realisation that growth in the Indian economy is led 80% or more by domestic factors, including supportive imports, and less than 20% by exports. Not only that, in the present world, even masters of mass and low technology export-led growth, such as China, do not have it easy. The exception is high technology, almost exclusively from the R&D rich developed world, to the underdeveloped world. This is somewhat inelastic and perennial, notwithstanding competition, and can often charge whatever it likes and not have to worry about exchange rates either.

Prime Minister Narendra Modi, on the campaign trail in 2013-14, did make it clear that he would work to strengthen the currency. And now, it is beginning to happen, to the delight of international investors like Jim Rogers, who not only likes strong currencies, but didn’t think a “talkative” Modi had it in him.

Recent economic circumstance has helped, such as an inflow of $8.85 billion foreign institutional investment (FII), in March 2017 alone. This illustrative amount has flowed into Indian equity and debt, following on from a positive sentiment occasioned by the recent thumping election successes. The last time this happened in a given month was in boom-time 2002.

India runs a tight fiscal deficit at 3.5%, heading towards 2.5% of an enhanced GDP and this is much admired. It has benefited from low inflation, lowered oil importation costs and the fastest growth rate in the world for any major economy, projected at 7.2% this year and nearly 8% next year.

The overt change in the government’s policy towards strengthening the rupee seeks to also reorient the focus of the exporting community. 

Indian exporters, for long, have been passively dependent on government intervention to keep the exchange rate favourable and themselves competitive in dollar terms. Accordingly, the government has routinely bought US dollars, stacking them in our foreign exchange reserves, and sold Indian rupees through the Reserve Bank of India (RBI), deliberately keeping the national currency weak.

Commerce Minister Nirmala Sitharaman and several others in the BJP, taking their cue from Prime Minister Modi and Finance Minister Arun Jaitley, have now suggested that export competitiveness should be looked at differently. Henceforth, it should be enhanced via improved policy decisions such as GST, digitisation, better company affairs management/transparency, and other initiatives in the pipeline. The operational thrust should be on improving efficiency via automation, superior logistics, better infrastructure, removal of physical and bureaucratic bottlenecks, more value-addition, development of a cold chain, etc.

Let us remember that our software exports are being hit, partially due to reduced demand because of automation and greater use of “cloud”, but also because of a tendency to body-shop and sell labour rather than invention and innovation.

Of course, a lot of the learned commentary may well concentrate on narrow focus statistics in the short term. This to claim whole swathes of Indian business and industry, from components to textiles, will be badly done by because of a strong rupee. It is true, after all, that allowing and abetting the strengthening of the rupee, flies in the face of the conventional policy position in place for a number of years. But it was, in hindsight, a position that ran contrary to the overall interests of the country, even if, like demonetisation, it involves some short term discomfort.

A stronger rupee now will lower our oil and import bills dramatically. Consumption spending on foreign goods will grow. 

The rupee reached a high of 64.41 on 13 April, the figure representing a 5% appreciation already against the US dollar in less than four months of this year. 

Assuming that the US Federal Reserve does not reduce interest rates, nor raise them more than three times a year, and at the present pace, the rupee should indeed, based on domestic factors, continue to strengthen against the dollar. Extrapolating the speed of current emerging trends, the prescient thinking is that we might be moving eventually towards Rs 30 to the US dollar, at less than half of the exchange rate today. This, not overnight, but certainly during the course of the “Modi era”, meaning the next 7-12 years.

Or could it happen quite soon, based on the present pace of things? Why not? Oil prices halved in six months via a demand supply mismatch, and fell further still before stabilising. Rs 30 is something of a time machine valuation target: it was last seen around 1994, 23 years ago, but could well come upon us again fairly quickly. Should this happen, in reflection of a constant stream of bold structural reforms/modernisations and their implementation, it has the potential to simultaneously transform the entire economic narrative of this nation root and branch.

Some well-worn things will become redundant, such as stashing black money secretly in convertible currencies abroad. There would simply be no need when the rupee is stable, strong and appreciating constantly. At double the present value, almost all fear of a flight of capital will also be automatically banished.

It has been suggested that the previous political regime, renowned for its corruption, may have also kept the rupee deliberately weak precisely to assist the valuation of their secret hard currency hoards abroad. Also, that in cahoots with foreign predators, they may have, for the price of suitable kickbacks, made it possible for the foreigners’ dollars to buy/sell much deeper into Indian stocks, debt, business/industry/defence.

The exact reverse may be true now. With a strong domestic economy and political stability, volatility caused by global trends, even the extreme condition of war, may not be very arduous.

This could set the stage for the rupee to go fully-convertible, as behoves an aspirant to the UNSC. In fact, other countries who trade or manufacture in India may well want to hold some of their reserves in the convertible Indian rupee. After all, India is set on a strong growth path for at least the next three decades.

The story so far, however, has been the exact reverse. We have seen two formal devaluations since Independence, once in 1966, when the rupee stopped being pegged at Rs 13 to the British pound (since 1926), and was re-pegged at an official rate of Rs 7.5 to the US dollar instead. This, inevitably, following on from major balance of payment crises, high inflation and almost non-existent foreign exchange reserves. This rate slid gradually, and was at Rs 17 to the US dollar in 1990, though unofficial rates ran at 20-30% higher. 

But as another major financial crisis hit India in 1991, the official rupee caught up after it had to be devalued substantially. That year also saw the most extensive economic liberalisation in independent India’s history. Through the first decade of the millennium, the exchange rate inched towards Rs 50 to the US dollar and higher still thereafter.

A stronger rupee now will lower our oil and import bills dramatically. Consumption spending on foreign goods will grow. As will the acquisition costs of companies and properties abroad. Indians taking foreign holidays will also benefit. Our purchase power parity (PPP) rankings will improve substantially. So will our lending, borrowing and sovereign ratings, and those of our leading enterprises. 

This will set up a virtuous cycle of foreign investment. It will grow our stock markets beyond recognition. The GDP, slated to double from over $2 trillion, in the next five years, will quadruple instead. The per capita incomes will improve substantially, given lower birth rates. Our national virtues of a vibrant democracy, a free and fair judiciary, media oversight, the rule of law, a large labour force and skilled professionals will all further strengthen our international appeal.

Bottom line: a strong economy makes for a strong currency. It is not a double-edged sword at all once the benefits start rolling in, and should be welcomed with open arms.

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