Q.8 ‘In the changed global scenario India needs modify its policy outlook in monitoring its exchange rate”. Comment.

Ans. Indian currency has seen frequent exchange rate volatility in recent times—in accordance to the changing external variables. 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—due to the following main reasons—

• 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, the yuan has depreciated about 11.6 per cent (between July 2015–December 2016 period) against the dollar and as a consequence the rupee has appreciated by 6 per cent against the yuan. This put a continuous concern of capital outflows from India.

• High growth rate needs support of exports which is only possible once the rupee’s exchange rate competitive. 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.

• 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).

• 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.