Advantage AxisDirect
- 20 investment products
- 3 great platforms to invest
- 5 fun-tastic learn courses
- 5 powerful research segments
- 4 prestigious awards
- 9 lakh+ happy investors
Quotes
Back To Menu
-
Offerings
- Markets
- Research
- Learn
- PORTFOLIO
Building stability for India’s economic growth
Raghuram Rajan, Governor, Reserve Bank of India
May 13, 2016 | Source: CNBC TV18
India has responded to the external volatility by trying to create a domestic platform of macroeconomic stability on which to build growth. India’s latest central budget emphasizes fiscal prudence, adheres to past commitments, and aims at structural reforms, especially in agriculture.
Fiscal consolidation has also helped to keep the current-account deficit under 1 % of gross domestic product. Moreover, inflation has been brought within the official target range. And parliament has created a monetary-policy committee for the Reserve Bank of India, which should ensure that multiple views are embedded in policy and improve continuity.
Unlike more developed countries, India does not have an effective bankruptcy system, though a bill to create one has just been cleared by the Parliament. But, using some “outof-court resolution” mechanisms devised by the RBI, and with capital support from the government, banks should have well-provisioned balance sheets by March 2017.
Many emerging markets have been hit by lower prices for their commodity exports, but India’s exports of goods seem to be doing worse recently than those of other emerging markets. At the same time, India’s exports of services are doing somewhat better, perhaps because of demand from the United States. Of course, these differences are over very short periods, so it is probably unwise to draw too many conclusions -- except that India is not alone in suffering a falloff in trade.
That does not stop industry bodies from demanding that the authorities “do something” - especially by lowering the value of the rupee. The rupee seems to have weakened by about 6 % against the dollar since the beginning of 2015. This depreciation should have helped our merchandise exports, and yet it coincides with their relative underperformance, because other currencies have depreciated against the dollar, too. For this reason, economists focus on the “nominal effective exchange rate,” which compares the rupee’s value to that of other currencies by weighing their share in trade. In tradeweighted terms, the rupee has remained relatively flat since early 2015. Hence there is a need to look at the “real effective exchange rate,” or the nominal effective exchange rate adjusted for inflation. The higher the index is, the less the exchange rate has depreciated to offset inflation -- and the more uncompetitive India is.
But exchange rates are only one measure of competitiveness. Productivity also matters. In a rich country, firms typically can improve productivity only through innovation. In India, productivity can be improved simply by building a better road from a factory to the railhead. Much of the appreciation in the real exchange rate is offset by increased productivity. India’s trade has certainly been slowing -- but not necessarily because of the rupee’s value.
The ideal exchange rate for India is neither strong nor weak; it is the “Goldilocks rate” produced by market forces, with the RBI focusing on attracting long-term capital inflows and intervening only to maintain orderly movement of the rupee versus other currencies. To ensure such an orderly market, in good times we must resist the temptation to open up too much to short-term foreign-currency debt. Our rules now encourage investors in infrastructure and other projects with limited foreign earnings to issue Masala bonds (whereby Indian companies can borrow abroad in rupees), or to borrow long term, thereby limiting their risk when the exchange rate moves against them.
So if the exchange rate is unlikely to be helpful, how should India export more? The answer is to improve productivity with better infrastructure; improve human capital with better schools, colleges, and vocational and on-the-job training; simplify business regulation and taxation; and improve access to finance.
“Encouraging” any industry may be the surest way of killing it. Our job as policymakers is to enable business activity, not to dictate its course.
Related Keyword
Inflation
Indian Markets
RBI
Macro Economy
Currency Devaluation
Similar Articles
Strengthening Rupee and Falling Inflation may Push the RBI for a Rate Cut - AxisDirect
Jul 20, 2017 | Source: AxisDirect
No Rate Hike by US Fed, Rupee Surges against Dollar - AxisDirect
Jul 27, 2017 | Source: Hindustan Times
Show more...vV5.0.0.6-60 Thanks for Liking, Please spread your love by sharing...As you have logged in from a different device/browser. This session has expired.Image size cannot exceed 512 KB. - Markets