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RBI under pressure to intervene, curb appreciation of currency

RBI under pressure to intervene, curb appreciation of currency
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First Published: Fri, May 25 2007. 12 32 AM IST

Conflicting claims: Demands to cut inflation, on the one hand, and to assist the exporting community and businesses dependent on outsourcing, on the other, are pulling the apex bank in opposite direct
Conflicting claims: Demands to cut inflation, on the one hand, and to assist the exporting community and businesses dependent on outsourcing, on the other, are pulling the apex bank in opposite direct
Updated: Fri, May 25 2007. 12 32 AM IST
New Delhi: India’s central bank is under pressure to curb a rise in the national currency, which a growing number of economists warn may threaten growth by creating a more expensive environment for outsourcing, a pillar of Indian economic success.
The rupee has climbed 9% against the dollar since the beginning of 2007, and jumped sharply in April. On Tuesday, 22 May 2007, it hit a nine-year high of Rs40.5225 to the dollar.
In the past, according to Manika Premsingh, economist with Edelweiss Capital in Mumbai, the Reserve Bank of India (RBI) “intervened in the currency markets”. But recently the bank “seems to have gone through a policy change and is now allowing the rupee to appreciate”, she said.
The bank is “finding it hard to do a balancing act” between lowering inflation and credit growth on the one hand and keeping the rupee from appreciating on the other, Premsingh said.
The growth may already be affecting the Indian trade balance, according to preliminary reports. Merchandise exports grew at a slower than expected pace of 8.8% in March, according to ministry of commerce data. The trade deficit grew 38% that month.
“India is just beginning to gain competitiveness, and exports had been doing very well,” Ramgopal Agarwala, a former World Bank economist and senior adviser to the RIS research organization in New Delhi, said.
Conflicting claims: Demands to cut inflation, on the one hand, and to assist the exporting community and businesses dependent on outsourcing, on the other, are pulling the apex bank in opposite directions.
The rise of the rupee has been a “negative shock that is very unwise”, he said.
Over the long term, an unchecked rupee could do even more damage, some economists say. A strong rupee may stifle the growing manufacturing sector, which is trying to compete with China, and topple outsourcing. Wages in India have risen as much as 25% a year in some sectors, as demand for skilled professionals has started to outstrip supply.
Agarwala and others argue that the central bank has been allowing the rupee to rise to control inflation, which remains above its target of 5%, despite RBI having raised its benchmark interest rate to five-year highs.
Consumers in India are feeling the pinch from rising costs of staples such as onions and lentils. Rural and lower income consumers, who are not benefiting as much from the country’s economic growth in the first place, are the ones who are the most affected—and politicians in India ignore them at their peril.
Critics of RBI say that controlling inflation through the rupee is shortsighted.
“Indian business is becoming outward-orientated, and that should be helped rather than hurt,” Agarwala said.
“China has devalued its currency in real terms by about 80% since reforms began, and India has not done anything like that.” Bank governors should be thinking in terms of “revaluation, not devaluation”, he added.
A strong rupee lowers the value of imports to India, and drives down the demand for exports, which should result in more, lower-priced supplies flooding the domestic market, therefore driving down inflation. But on the flip side, companies that rely on exports or on attracting outsourcing contracts are hurt.
An RBI spokeswoman, Alpana Killawala, said the bank never comments on its actions. The central bank may move in the next few months to lower the rupee’s value.
“There is a strong chance the RBI may step in once it gets some comfort on inflation numbers,” Premsingh said.
Edelweiss Capital expects inflation to drop below 5% in June, she said. “We could see the RBI step in then.”
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First Published: Fri, May 25 2007. 12 32 AM IST
More Topics: Money Matters | Currency |