Should India follow emerging markets to protect rupee?
Anand Adhikari August 31, 2018
The rupee breached its crucial 71-mark against dollar for the first time on Friday, but it hasn't crashed as much as Turkish Lira or Argentine Peso did versus the greenback. These currencies depreciated over 70 per cent so far this year, while rupee shed 10 per cent, and is comparable to the currencies of Indonesia, South Africa and Brazil. However, this doesn't mean that the domestic currency has come out of the danger. The only relief is the decline is across emerging markets, and not India-specific. The fall came in the backdrop of vulnerable macros in emerging markets and strength in dollar, which has been going strong thanks to a better growth in US and rising interest rates. The central bankers and governments of the EM countries have taken a number of steps to protect the value of their currencies.
What are these measures and is there any learning for India to do the same? Take a look:
Aggressive doses of interest rate hikes
The Argentina has raised interest rates to a record high of 60 per cent to protect the value of their currency. The benchmark interest rate in Indonesia was in the region of 20 per cent a few months ago. Today, its interest rates are highest in the world. Remember India has a benchmark interest rate of 6.50 per cent. Similarly, Turkey, whose currency has been battered in the market, has also increased the interest rates. The experts suggest rupee hasn't seen a crash like Turkish Lira or Argentine Peso did. Also, interest rate is not the right tool at this juncture for India to use it for protecting the currency. The RBI's focus is on targeted inflation to adjust the interest rates accordingly. The interest rate tool should be used strategically as global interest rates are also on the rise, which makes the domestic market a bit unattractive for investors.
Indonesian government has done some aggressive intervention in the currency market. They have used almost 10 per cent of their foreign exchange reserves to protect the currency. In fact, the RBI has been using the foreign exchange to reduce volatility in the rupee rate. But there is no let-up in rupee depreciation. If the rupee falls further, RBI will surely resort to other measures, while continuing to intervene in the market. Any aggressive intervention will deplete the foreign exchange reserves and impact the macro-economic stability.
Indonesian government has imposed a tax of 7.5 per cent on goods that can be sourced domestically rather than importing them. They have identified a list of hundreds of goods that will come under import tax. This helps when you have a trade deficit. India with twin deficit -trade as well as current account deficit - can do the same. India's imports of electronic items have increased big time in the recent years. Similarly, India imports things like walking sticks, buckets, and glasses etc, which can be easily manufactured in the country itself. Back in 2013, when rupee was falling like a rock, India did impose higher import duties on gold.