Should Rupee be allowed to appreciate?

Normally, currencies appreciate when the economies are doing well and the rise in their values is a cause for celebration. It is in India’s interest to allow rupee to appreciate to a certain level. This will pave the way for further liberalization of capital flow. India’s long term objective should be to allow free flow of international capital to further deepen the capital market.

With the oil prices touching a new level every day, it is high time that RBI does a rethinking on this front. India imports almost three-fourth of oil which drastically impacts the imports bill thereby affecting the balance of payments.

There are two views on this issue. Those who are against rupee appreciation argue that if rupee is allowed to appreciate further, then exports will be crippled. Exporters are already finding it difficult to match the competition from China especially in textiles. Any further appreciation and the industry may be shut down.

The IT sector which is making the most noise against rupee appreciation should have realized by now that their phenomenal growth during the last decade was due to rupee depreciation. But Indian economy apart from IT needs huge funds for infrastructure development. A big chunk of funds will have to come from abroad.

Those for the appreciation believe that foreign investment is essential to accelerate growth. India is a story now and it is bound to attract foreign capital owing to its strong economic fundamentals. If offshore capital flows drive up the currency, so be it. RBI should not intervene to stop currency appreciation. It will only flood the market with rupees.

Inflation is another concern for the RBI as well the government. A cheaper dollar means cheaper imports and lower inflation. Only a few weeks back, inflation was quite under control. But with the depreciating rupee, inflation has crossed beyond 5% which is the tolerance level for the RBI. Rising rupee is good news for the oil companies as they are already under tremendous pressure due to volatility in crude prices.

Therefore, rupee appreciation should be viewed in the broader context of its impact on the economy as a whole. The appreciation of the rupee has helped in bringing down the country’s import bill particularly that of oil imports which easily accounts for more than a third of all imports. This in turn helps the country in bringing down the trade deficit. Industry will be able to source its inputs from abroad at a cheaper price and hence can export more. Indian companies should learn to live with rupee appreciation and try to exploit it to the hilt.

Thus, rupee appreciation is good for economic health of our country but it carries certain demerits. But these demerits can be removed by the intervention of the government with certain favourable polices. Some of the steps that can be taken are reducing export duty for the exporters and waiving off the custom duty.