Each day, the rupee appreciates more against the dollar. With forward premiums continuing to drop, an exchange rate of Rs 46.5 against the dollar is not far off. Mr Rakesh Mohan’s comment that rupee appreciation is in line with global currency movements suggests that the Reserve Bank of India will not intervene to stop appreciation. Given India’s excessive foreign exchange reserves, this is understandable. Short of more exchange control liberalization (easing norms on international credit cards is the latest), the RBI should be reluctant to intervene, despite some alarmists suggesting that India’s exports will collapse. First, while the rupee has appreciated against the dollar, other currencies have appreciated more and the rupee therefore continues to be undervalued by around 3 per cent. Second, the plus 16 per cent dollar growth in India’s exports in 2002-03 took place despite the rupee strengthening against the dollar and global demand conditions not being that favourable. This suggests a maturing of India’s exports and reduced price sensitivity. Third, there is a difference between export of goods and export of services. From a balance of payment point of view, what matters is overall supply of dollars. If that is boosted through capital inflows and service exports, so be it. The dollar’s continued depreciation is not something that will disappear in a hurry.
Growth in the United States of America is indeed higher than in Europe, and with the Iraq war over, oil prices dropping and consumer confidence and stock market indices inching up, Mr Alan Greenspan is right to presume that the US economy will do better than in 2002. US domestic concerns, including tax-cut proposals, are linked more to growth not leading to jobs, reminiscent of the senior Mr George Bush’s electoral loss. Globally, dollar depreciation has been driven not by lack of US growth, but more by investor unwillingness to finance high US current account deficits. European interest rates are also higher. US foreign liabilities and debt service payments require the dollar to drop further, a policy that the US Treasury and Federal Reserve seem to favour. After all, on both growth and inflation, a depreciating dollar has the same impact a cut in interest rates does. Trading partners (other than India) are also concerned about their export competitiveness being undermined by dollar depreciation. Examples are Japan and China and eventually, there will also be resistance among European exporters, not to speak of US alarm at foreign investors pulling their money out of American markets. However, at the moment, the dollar seems to be headed further downwards.