RBI under pressure to curb currency rise

RBI under pressure to curb currency rise
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First Published: Thu, May 24 2007. 10 07 AM IST
Updated: Thu, May 24 2007. 10 07 AM IST
New Delhi: Concerned that the rising value of the Indian rupee is threatening to limit the country's economic growth, especially in the lucrative outsourcing industry, monetary policy experts have started putting pressure on the Reserve Bank of India to stem the rupee's rise.
So far the central bank has taken no action, and some critics say it is also under pressure to keep inflation down.
"In the past, the RBI intervened in the currency markets," said Manika Premsingh, economist with Edelweiss Capital in Mumbai, referring to the bank by its initials. But recently the bank "seems to have gone through a policy change and is now allowing the rupee to appreciate," she said.
The rupee has climbed 9% against the U.S. dollar since the beginning of the year, sharply in April. On 23 May, it reached a nine-year high of 40.58 to the dollar.
The growth may already be affecting India's trade balance, according to preliminary reports. Merchandise exports grew at a slower-than-expected 8.8% in March, according to Commerce Ministry data. The trade deficit grew 38% during the month.
"India is just beginning to gain competitiveness, and exports had been doing very well," said Ramgopal Agarwala, a former World Bank economist and senior adviser to the policy research organization RIS. The rupee's rise has been a "negative shock that is very unwise."
A strong rupee may stifle India's growing manufacturing industries, which are trying to compete with those of China, and threaten one of the pillars of India's success -- outsourcing. Wages in India have risen as much as 25% a year in some sectors, as demand for skilled professionals starts to outstrip supply.
Agarwala and others say that the bank has been allowing the rupee to rise in order to control domestic inflation, which remains above its target of 5%, even though the benchmark interest rate is at a five-year high.
Consumers are feeling the pinch as costs rise for staples like onions and lentils. Rural and lower-income Indians, who have benefited least from the country's economic growth, are the most affected -- and politicians in India ignore them, the country's majority, at their peril.
A strong rupee lowers the value of imports into India and drives down the demand for exports. The result should be a flood of lower-price supplies on the domestic market, which would help drive down inflation. But it also hurts companies that rely on exports or are trying to attract outsourcing contracts.
The central bank is "finding it hard to do a balancing act" between curbing inflation and credit growth, and keeping the rupee from appreciating, Premsingh said. Many newspapers have carried criticism of the bank's actions.
"It is also time the policy makers remembered that exchange rate is not like the price of cabbage that can be left to the pure market forces of demand and supply," professors of Pondicherry University wrote in The Hindu on 19 May.
A Reserve Bank of India spokeswoman, Alpana Killawala, said that the bank never commented on its actions. But others said they thought that the bank might 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."
Several other countries on the subcontinent and in Southeast Asia are eager to capture some of the outsourcing business that has been dominated by India. Vietnam, the Philippines and Malaysia are all expected to join the competition. So far, though, specialists in the field say it is too early to see any impact from the rupee's rise.
"The problem is that the technology industry here in Vietnam has so far not caught up to India," said Karen Davies of Opus Recruitment in Vietnam. "Although there are a lot of people in university studying, there are few experienced people in the marketplace. Over the next three to five years, I see that changing. It's just not going to happen overnight."
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First Published: Thu, May 24 2007. 10 07 AM IST
More Topics: Money Matters | Currency |