Avoid currency devaluation - The Hindu BusinessLine

Avoid currency devaluation: "Avoid currency devaluation

Prabhat Kumar

COME uncertain times and exporters organisations start lobbying for devaluation of the rupee to enhance India s competitiveness in exports. The usual justification advanced by them is the fall in the real effective exchange rate REER , that is, fall in value of the rupee versus the dollar. However, it is well-known that countries do not gain by way of devaluation of currencies in the long run. At best, exporters gain on the foreign exchange holdings stashed in the banks or on amounts yet to be repatri ated. Any other expected gain is neutralised by reduction in the prices of export goods and/or by the rise in prices of inputs used in such goods.

Notwithstanding threat of an economic slowdown, especially in the export sector, there is a strong case for defending the rupee. Recently, the greenback that has had a bull-run rising to 120 per cent of its real value in trade-weighted average terms, is coming down against the euro and other major currencies. Euro has gained over 10 per cent against the dollar this year. The rupee is tied strongly to the dollar and, thus, has depreciated too.

The recent slump in India s exports is purely on account of the sluggish US economy and consequential impact on other economies. Exports plummeted not just in India, but also in South-East Asia. Countries"