RBI should allow rupee depreciation to help exports

Any depreciation in rupee on account of China-led turmoil in the global financial markets should only be a welcome sign for India, says ASSOCHAM 

The Dollar Business Bureau 

  Indian exports can be more competitive if the Reserve Bank of India allows the currency to depreciate, an industry body has said, and suggested the central bank to use its forex reserves in defence only in a rout situation. “Any depreciation in rupee on account of China-led turmoil in the global financial markets should only be a welcome sign for India, else Indian exports will suffer more at the hands of China and other emerging countries witnessing correction in their currencies,” said Associated Chamber of Commerce and Industry(ASSOCHAM) in its report 'Implications of Devaluation of Chinese Yuan’. Stating that China is a major challenge for India’s export competitiveness in the global market, the report pointed out that the yuan devaluation will negatively impact Indian firms which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade. “The biggest concern is the steadily deteriorating balance on the merchandise trade account with China,” ASSOCHAM President Sunil Kanoria said.  According to the paper, the deterioration of Indian rupee with respect to yuan devaluation has been rather steady and secular in the last few years with exports to China dropping. However, with a sharp reduction in prices of Indian primary commodity exports, the export value is bound to decline in a disproportionate manner to imports since the inward shipments comprise capital, telecom and manufactured goods, it noted. India’s trade imbalance with China, which was at $48.5 billion in 2014-15, increased by a third over $36.2 billion of the previous year due to “reflection of India's inability to penetrate the Chinese markets, a problem that seems to have aggravated over the past three years”.  “Going forward, the situation does not look good; rather it has deteriorated with the Chinese demand for primary goods declining and crash in prices,” the report said.    The study also noted that the yuan devaluation can hurt Indian goods market even in a third country market, since the rupee depreciation has not been sharp enough to give competitive edge to the country's exporters.  The fact that China and India compete for several export items such as textiles, leather goods, light engineering, gems and jewellery etc is an additional challenge faced by the Indian exporters. Besides, there is also a concern that a weaker yuan will help China dump goods into the Indian market. “While it is true that India is not as badly affected by the global headwinds, we cannot remain insulated and the wisdom lies in cushioning ourselves with generating more traction in the domestic economy while seeking to make Indian exports competitive,” it added.  

January 18, 2016 | 04:45pm IST

The Dollar Business Bureau - Jan 18, 2016 12:00 IST