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India doesn't need a weaker rupee to boost export
Rajeev Malik, Senior Economist, CLSA
Sep 16, 2016 | Source: CNBC TV18
India does not need a devaluation of rupee for now. At this point currency devaluation could be a costly affair. It may spook investors and may impact capital flows. The government is considering a proposal for a weaker rupee in an attempt to make it more competitive.
According to a Reserve Bank of India report, rupee has been over-valued by 10-12 percent. This may be an attempt to make Indian goods more attractive to foreigners as they would become cheaper. This will boost export competitiveness. Instead, focus should be on productivity gains and enhancing structural competitiveness. This will increase export volumes and will help exchange rates.
If Make in India and ease of doing business initiatives of the government are doing as good as they are reported to be, they should have already led to a boost in exports. India still suffers from a high inflation rate. There is a structural chance of the rupee weakening due to high inflation. India can keep a check on relative inflation to maintain a stable and favourable rupee.
RBI is sure to cut rates at least once before the end of year. Inflation may come down further, but RBI is going to focus on a sustained inflation profile. The 5 percent inflation target set for March 2017 is achievable but the five year inflation target set at 4 percent is very ambitious. The onus of achieving the target lies with the government and not the RBI.
Inflation in India is very volatile. Its volatility comes from changing food prices. Monsoon rains are going to end deficient compared to average. I’m still confident saying the overall monsoon profile is much better. I do not think growth forecast needs to be lowered due to small rain deficit.
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