By Faisal Farooqui
Central banks worldwide often struggle to balance controlling domestic inflation with promoting export growth. The Reserve Bank of India (RBI) typically strengthens the US dollar relative to the rupee, believing this will make exports more competitive and generate foreign exchange. However, this approach results in higher import costs and increased prices for essential goods, such as crude oil and consumer products, which lack local substitutes.
India’s economy is driven primarily by domestic consumption rather than exports. Our economic growth is fueled by local demand, supporting numerous industries and significantly boosting GDP. A stronger rupee would reduce import costs, lower inflation, and enhance consumers’ purchasing power, thereby increasing domestic consumption. This boost in local consumption would stabilize the rupee by making the economy less dependent on volatile export markets.
Despite significant foreign portfolio inflows, the USD/INR exchange rate remains weak, indicating a deliberate effort to undervalue the rupee. This strategy, aimed at boosting exports, hinders overall economic growth. The RBI’s large-scale dollar purchases have shifted liquidity from a deficit to a surplus, reflecting extensive monetary interventions.
To address this, the RBI should adopt a market-driven approach and allow the rupee to appreciate naturally. By selling $70-100 billion from its substantial foreign exchange reserves over the next six months, the RBI can decrease liquidity, support the rupee, and show confidence in India’s economic stability. Excessive dollar selling can drive the INR up, and within a quarter, the RBI can balance this by lowering domestic lending rates by at least 50 basis points. With forex reserves at $650 billion as of May 2024, we are well-positioned to implement these measures and maintain the INR at approximately 67-69 to the dollar.
A stronger rupee has additional benefits. It can lower borrowing costs for Indian businesses, making it cheaper for companies to invest in growth and expansion. This can lead to job creation and higher wages, further boosting domestic consumption. Moreover, a stronger rupee enhances the appeal of Indian assets to foreign investors by reducing currency risk, leading to increased foreign direct investment (FDI) and fostering economic and technological advancements.
Lowering the dollar will also make imports cheaper, reducing the cost of essential goods and raw materials. This benefits both consumers and industries that rely on imported inputs, helping to contain inflation and improving consumers’ purchasing power. Additionally, enhancing the Liberalised Remittance Scheme (LRS) limits to $500,000 and abolishing the Tax Collected at Source (TCS) would demonstrate the RBI’s confidence in the rupee, signaling a stable currency regime to foreign investors.
By prioritizing the value of the rupee, aligning with India’s domestic demand-driven growth model, we can ensure lasting economic stability. Fostering a stable domestic consumption environment and managing import costs effectively will lead to sustained economic resilience and growth. A stronger rupee will fortify India’s position in the global economy, reducing vulnerability to external economic fluctuations and promoting a more balanced trade environment, securing a prosperous future for the nation.
(The author is Faisal Farooqui, Founder of Mouthsut.com, and the views expressed in this article are his own)
