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India Economist/Strategist

Ashutosh Datar

Macroeconomics

<p>The Indian rupee has fallen 8% YTD and if it remains here, 2018 will be the 4<sup>th</sup> worst year for the Indian rupee (vis-à-vis the US Dollar) in the last two decades. While the fall has alarmed many, there is every reason to treat the rupee’s depreciation this year as part of the natural adjustment to correct the imbalance in India’s external account. This process would have got completed a few years back but for the sharp fall in international oil prices which masked the underlying worsening in India’s balance of payments. While the weaker currency will have its costs, the costs as they appear today are modest. It is far better for this adjustment to happen through a realignment of the exchange rate (market forces) rather than through tariffs or quotas which create distortions of their own. The risk of weaker currency stoking inflation forcing the RBI to increase interest rates is overblown at this stage. The fall in rupee is also not creating any outsized macro instability at this stage. On REER basis, the rupee is still 20% above the level in September-2013 just after the taper tantrum. The essence of free markets is that businesses deal with market volatility which is inevitable when markets set prices. This market-driven, relatively benign, adjustment in India’s external account should thus be welcomed rather than resisted and is positive from a medium-term perspective.</p>

The Indian rupee has fallen 8% YTD and if it remains here, 2018 will be the 4th worst year for the Indian rupee (vis-à-vis the US Dollar) in the last two decades. While the fall has alarmed many, there is every reason to treat the rupee’s depreciation this year as part of the natural adjustment to correct the imbalance in India’s external account. This process would have got completed a few years back but for the sharp fall in international oil prices which masked the underlying worsening in India’s balance of payments. While the weaker currency will have its costs, the costs as they appear today are modest. It is far better for this adjustment to happen through a realignment of the exchange rate (market forces) rather than through tariffs or quotas which create distortions of their own. The risk of weaker currency stoking inflation forcing the RBI to increase interest rates is overblown at this stage. The fall in rupee is also not creating any outsized macro instability at this stage. On REER basis, the rupee is still 20% above the level in September-2013 just after the taper tantrum. The essence of free markets is that businesses deal with market volatility which is inevitable when markets set prices. This market-driven, relatively benign, adjustment in India’s external account should thus be welcomed rather than resisted and is positive from a medium-term perspective.

Indian Rupee's Depreciation Should Be Welcomed Rather than Resisted