New Delhi, Sept 2: India’s stronger currency has become a threat for its growth aspirations, piling pressure on the central bank to aggressively intervene in the foreign exchange market even at the risk of incurring the wrath of the United States.
The rupee has risen more than 6 percent this year against the dollar, snapping six consecutive years of depreciation, with the impact magnified by the decline of many competitors’ currencies against the greenback over the same period.
That is weighing on an economy that is struggling to cope with disruption caused by ambiguous rules of a recently launched Goods and Services Tax (GST), and has yet to fully recover from Prime Minister Narendra Modi’s crackdown on “black money”.
While the rupee’s surge is being driven by strong capital inflows lured by India’s economic and political stability, it is making the country’s exports less competitive and is also driving up imports, prolonging a slump in manufacturing.
An exports slowdown dented GDP growth by 2.6 percentage points in the last quarter. Overall economic expansion cooled to 5.7 percent in the June quarter, data released on Thursday showed, its slackest pace in more than three years.
“(The) rupee is now really hurting growth,” said Pronab Sen, the former Chief Statistician of India and now a country director for think-tank International Growth Center. “It is about time India does something about it, else we will have to brace ourselves for an extended spell of weak growth.”
Indian policymakers were banking on an improving global economy to lift demand for Indian goods, helping improve capacity utilization levels at Indian factories, which are running nearly 30 percent below their capacity
The Indian currency appreciated 4 percent against the dollar during the last quarter, whereas the Chinese yuan and Malaysian ringgit depreciated by 1.9 percent and 2.9 percent, respectively.
Ajay Sahai, head of the Federation of Indian Export Organizations (FIEO), says this price differential of nearly 6 percentage points made it tougher to compete with Chinese exporters in non-branded segments such as tiles, leather and garments.
“This price gap is good enough for a company like Wal-Mart to shift its orders to other locations,” Sahai said.
With inflation way below its medium-term target, the RBI could look to cut interest rates to prevent further currency appreciation. It could also aggressively cap the rupee by buying dollars to build foreign exchange reserves.