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Fear of competitive devaluation?

Fear of competitive devaluation?
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First Published: Thu, Dec 25 2008. 10 41 PM IST

Updated: Thu, Dec 25 2008. 10 41 PM IST
Faced with a slowing economy and a widening current account deficit, the Vietnamese central bank devalued its currency, the dong, by 3% on Thursday to boost exports. Earlier, Russia devalued the rouble for the third time in a week, as the price of oil, the country’s largest export, fell sharply.
Earlier this month, there was concern that the Chinese, faced with a drop in exports, may devalue the yuan after president Hu Jintao was reported in the People’s Daily newspaper as saying: “With the spread of the global financial crisis, China is losing its competitive edge in the world market as international demand is reduced.”
And finally, the US dollar index, which measures the value of the currency against a basket of currencies, has fallen to 81.21 from a peak of 88.28 on 21 November. The huge monetary and stimulus plans being unveiled in the US have led to worries over their effect on the dollar and brought back memories of the 40% devaluation of the dollar against gold during the Great Depression.
These are early days, but observers have been warning about the fear of competitive devaluations as export-dependent countries try desperately to boost their economies.
Also See Declining Value (Graphic)
Should India worry? A look at the numbers shows there’s little reason to, at least so far. Consider, for instance, the case of the Vietnamese dong. Data sourced from currency website www.oanda.com on inter-bank rates show that one dong was worth $0.00006354 on 1 January 2008 and is now worth around $0.00005964. That’s a depreciation of 6% against the dollar this year.
Now contrast the dollar-rupee rate. On 1 January, the rupee was worth $0.025370 and is now worth around $0.020280, or a depreciation of 20%. As for the yuan, a similar calculation shows that the Chinese currency has gained 6.6% against the US dollar this year. The chart shows how much the rupee has gained/lost against the currencies of other Asian countries this year.
It’s clear that the falling rupee has added to the competitiveness of Indian exports. Also, while it’s true that reports have been coming in about Chinese dumping of goods into India, the 25% depreciation of the rupee against the yuan this year will act as a cushion for domestic manufacturers. In fact, the rupee has even depreciated against the Bangladesh taka and the Sri Lankan rupee this year.
Of course, all this doesn’t affect the argument that the Chinese currency is in any case grossly undervalued and they need to revalue it upwards. And if competitive devaluations do happen, the situation could deteriorate rapidly. But so far, for Indian exporters, the weak rupee has been a help.
Write to us at marktomarket@livemint.com
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First Published: Thu, Dec 25 2008. 10 41 PM IST