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Indian currency has seen frequent exchange rate volatility in recent times. External variables have been changing more frequently than any time in past. This forces India to closely monitor the exchange rate dynamics of the world, its major trade partners and the emerging competitors in its export market. India needs to rethink its exchange rate policy outlook and go for a shift in it
—this becomes even more clear by considering the following points19:
(i) International trading opportunities are becoming scarcer in the aftermath of three major events—global financial crisis, the eurozone crisis and the stock market meltdown of China (2015). The world ‘export-GDP ratio’ has declined since 2011. Going forward a sharp rise in the US dollar is
expected with a corresponding decline in the currencies of India’s competitors, notably China and Vietnam. Already, since July 2015, the yuan has depreciated about 11.6 per cent (form July 2015 to December 2016) against the dollar and as a consequence the rupee has appreciated by 6 per cent against the yuan. Given the situation there has been a continuous pressure of capital outflows on India.
(ii) To sustain high growth rate, India needs support of exports in the coming times. And this is only possible once rupee’s exchange rate is able to maintains the competitive edge over its competitors in the export market. The rise of countries such as Vietnam, Bangladesh, and the Philippines is a new matter of concern which compete with India across a range of manufacturing and services.
(iii) India’s present exchange rate management policy gives unusually high weight to UAE (due to high oil imports and a trans-shipment point for India’s exports). But this trade has almost nothing to do with India’s export competitiveness. The policy currently considers overall trade in place of the sectoral situations and their relations with the exchange rate. due to this India gives heavy weight to euro, even though it is really Asian countries which are India’s main competitors (not Europe).
(iv) Ever since the developed countries came under the grip Great Recession, we have seen ‘unconventional monetary policy’ being pushed by most of them—with effective interest rates running in negatives, too. While the central banks in the west have been aiming to push up inflation and growth through it, RBI has been balancing them (till March 2017). Given the situation, it looks advisable for the RBI (through ‘Monetary Policy Committee’) to recalibrate its monetary policy outlook.