This brings out the main question: what about the Indian Rupee? Why today INR 1 is not equal to USD 1? What is stopping it in becoming equal to the USD in value? Keeping in view the amount of black money reserves, investments abroad and our total until date gold purchases & other natural reserves should make us numero one currency in the world. If it is international remittances’, IT earnings or exports that keep us back in appreciating our dear rupee then it is not only completely wrong but also ethically unviable.
At present, all economists and market analysts point out that the exchange rate has limited influence on our GDP vis-à-vis export earnings, as balance of trade is already in the world’s favor and not ours. Then what is keeping us back? INR has to appreciate against world currencies’ to keep our position as a world economic power in our favor. This would make imports cheaper in value only.
By printing dollars, the US could easily handle various difficulties caused by the financial crisis. This has led to inflation, near zero interests, decline in GDP and depreciation of the USD. We in India have actually willfully depreciated our rupee when it is supposed to appreciate against the USD vis-à-vis our yearly rising growth rates. This is not acceptable to us in India under any circumstances viewing the large size of our economy.
Americans realize that it also means the depreciation of the Dollar and the decline in its status. With the relative slump of European and US economy, India has become the chief engine only second to China in the global economy and the INR has gradually turned an important part of the international monetary system. In other words, INR appreciation actually means the US dollar depreciation against the INR instead of INR appreciation against the US dollar. This poses a threat to the USD thus forcing us to keep our valuations low.
We in India should also consider the future problems at a strategic angle, that is, after the INR becomes a universal currency, that is if it does become one then, how it will settle itself in the world economy messed up by the US dollar or a falsely manipulated Yuan. We should understand that the actual strength of INR and our economy is not adequate for this task unless we let our rupee appreciate. Rupee appreciation is truly the need of the hour to keep inflation in check, to bring more prosperity to the already faltering economy, keeping petroleum imports cheaper and especially helping us to emerge as a world economic power.
Today it is not impossible to mark the prices of bulk commodities with INR, as our consumption is only second to that of China. We should ensure that the world markets should see an increasing demand for INR especially in Asia. We should take precautions on how to balance the influence caused by international demands and its effect on rupee appreciation and its impact on the domestic economy.
To understand this problem we have to go to basics of Currencies creation & valuation in India.
RBI has monopoly and regulatory control over the production of currency through its monetary policy. In order to facilitate trade between other countries, it sets up exchange rates, where goods and services can be exchanged against each other. Today INR is considered partially convertible as RBI controls international investments flowing in and out of the country. While most domestic trade transactions are handled without any special requirements, there are significant restrictions on both inbound and out bond international investments and special approvals are often required in order to convert our rupee into other currencies. This means that our Rupee is being deliberately kept low, as international factors will only actually make it rise only. The RBI should make it fully convertible.
This convertibility is now the bone of contention between many thinktanks in the nation, as our rupee should actually be priced at INR 7 against 1 USD and in this ratio against other world currencies. Billions of USD have come in and gone but INR has only fallen in value rather than appreciating. Tons of Gold & other precious metals have come in but still the rupee is being kept low against USD is not digestible at all.
There are four major reasons given for its depreciation against USD by our economists, which always fall flat on my ears.
Firstly, the grim global economic outlook, investors are considering dollars as a safe haven for their investments in the longer run. This leads to an increased demand for dollars vis-à-vis the rupee and thus its depreciation. RBI sets the value of the rupee due to its partial convertibility status. I believe on becoming fully convertible the INR would sky rocket to new highs against the USD.
Secondly, the reasoning of the fall in rupee is being attributed to the speculations prevailing in the markets like importers suddenly scrambling for dollars as a hedging option, thus leading to an increased demand for dollars and exporters clinging on to their dollar reserves, speculating that the rupee will fall further in future are all crap. One should understand that USD reserves with RBI are above 250 Billion hence these childish speculations have little or no effect on rupee at all.
Lastly, the shift of FII’s from the Indian markets thus leading to an increased demand for dollars again holds no water as it cannot go above USD 30 Billion under any circumstances.
Fourthly, the rising import bill is also wrong, as a high valued rupee would actually lead to a cut in our dollar spending. Additionally, reducing inflationary pressures, as imports will become cheaper thus reducing the prices of key commodities such as oil, imported coal, minerals, and metals.
I hope that our government takes positive steps to see our rupee rise in value rather than fall.