Posted On Saturday, May 12, 2012 at 03:11:55 AM
|At 300 billion dollars we are among the world’s six largest stock of dollar reserves
The mighty rupee is falling against the almighty dollar. It now takes 54 of them to equal one American greenback. It wasn’t always so. Just a few months back it only took 48. This recent fall has been rather quick. The rupee lost ten per cent in just two months. It has been the quickest loser among all global currencies. If you are planning a holiday in London or New York you are in for a shock. If you are joining an American University this is going to burn a hole in your pocket.
But is this really a cause for alarm? Should we be losing sleep because the svelte Miss Roopee is dancing with the dashing Mr Dollar in Studio 54? Why they may shift to Studio 55 or 56 soon, and will that be a bad thing.
Here’s why it is not so alarming. Firstly, the weak rupee is helping our exports. Not only is the rupee weakening against the dollar, but also against most other currencies. Most notably it is much weaker than the Chinese renminbi (RMB). This means that in markets where Indian goods compete with Chinese goods, the Indians are winning.
This has helped our exports in labour intensive industries. Textiles, leather footwear and even small and medium industries are happy. India just recorded its highest ever exports of more than 300 billon dollars, in a global economy which is still sluggish. That does not even count the earnings from IT and software exports. The weak rupee is brining a smile to many software companies like TCS, Cognizant and Infosys.
Even though weaker rupee makes oil imports expensive, the price of petrol and diesel is politically regulated in India. So the impact on our petrol pumps won’t be immediate. And strangely, a weak rupee means we earn extra in petrol and diesel exports. Yes India has become a significant exporter of petrol and diesel, to countries like Iran and Saudi Arabia.
That’s because our domestic refining capacity (think Jamnagar and Bhatinda) is far in excess of domestic requirement. So we import far more crude oil, and export the surplus in the form of petrol and diesel. At this pace the export of petrol and diesel will earn us more than export of software and IT services in a couple of years. Remember, exports create jobs and dollars.
A second reason that a weak rupee is not as alarming as it used to be, is because our foreign exchange reserves are plenty. At 300 billion dollars we are among the world’s six largest stock of dollar reserves. So we have plenty of room to live with an exchange rate of 54 to 60.
A third mitigating factor, is the inflow of remittances and NRI deposits. As dollar gets stronger, and interest rates on non-resident dollar deposits are deregulated, we get a surge of these NRI deposits.
Our NRI cousins get barely 1% return on a fixed deposit in an American or European bank, but get almost 10% return here. That too without tax deduction. Who can resist that? Inward remittances of workers from IT or Dubai are the highest in the world. A weak rupee seems to encourage people to send more money home.
A fourth and very important reason to not panic, is that this rupee weakness is ultimately self correcting. Beyond a certain reasonable limit, markets will gyrate in the other direction. Stock market investors, sensing an inevitable correction will send in dollars, which can quickly lead to a stampede.
That very stampede causes the rupee to gyrate upwards quickly, causing more investment to come in. Meanwhile the RBI is already tinkering to make the rupee calm down.
So relax, there’s no need to panic. Or as Mario Miranda once said: “I don’t mind the Rupee falling, so long as some of it falls on me!”
• Build consensus
This is with reference to Ajit Ranade’s last week column ‘Beware of the drought mafia’, (PM, May 5). I agree with the author’s view on dealing with the threat of a serious drought in Maharashtra. The state government shouldn’t panic and make decisions in haste. Instead it should win the confidence of all parities and chalk out a plan which will convert the crisis into an opportunity. For this, it can consider the example of the then Chief Minister V P Naik, who steered the state out of a similar crisis in 1972. Given the progress in science and technology, the present government is better equipped.
- Shyam Ratan