Exchange rate of a currency in integrated global economies is bound to be affected by global events. In the globalised world, US Dollar (USD) is widely used currency for international transactions. Hence, exchange rate against USD is considered as an important indicator for policy makers of any country. The exchange rate affects the export & import of goods and services, currency reserves, interest rates of debt from other countries, prices of consumer goods etc. Thus, it has an impact on macro as well as micro economics of a nation.
We frequently hear about ‘rupee depreciation’. It means decline in the value of rupee relative to another currency (especially USD). Depreciation occurs when, because of a change in exchange rate, a unit of one currency buys fewer units of another currency. The exchange rate depends on the basic economic principle of demand and supply of the currencies.
Any reportage or opinion on a topic of such importance is expected to give the right signals to policy makers, industries, consumers and international community. Headlines and analysis by news media act as such signals to wide range of readers. They shape the opinion of the people about events.
Rupee depreciation has certain advantages as well as disadvantages for an emerging market economy like India. To figure out how these are portrayed in the news media, we resorted to a Google news search on ‘rupee depreciation and Indian economy’ during UPA period (1-Jan-2009 to 26-May-2014) and from 27-May-2014 till date (12-Jul-2018).
Then - 2009 to 2014
If we look at some prominent headlines between 2009 to 2014, we can find several advantages of rupee depreciation such as boost to exports, tourism especially medical tourism, boom in IT sector, cheaper education loans for studies in foreign universities etc. It was argued that depreciating rupee had positive impact on fiscal health of India. To quote from an article by Swaminathan Aiyar of those times here – “The current account deficit was a whopping 4.9% in the first half of 2013-14, but rising exports and import compression (mainly through gold controls) slashed this to 1.2% of GDP in the third quarter. This may not be sustainable, but the annual deficit is now projected at around 2.5% of GDP, which is sustainable. Exports did not grow when the rupee fell from Rs 45 to Rs 55 to the dollar. But after the rupee fell further to Rs 62 per dollar, exports grew. This is an argument for the RBI to let the rupee to fall further, to maybe Rs 65 per dollar by the end of 2014.” The argument seems to be – as rupee falls, exports grow, and as exports grow, fiscal health strengthens.
Another piece here by Sajjid Chinoy, argues – “The depreciation of the currency over the last year has been one of the most important – and needed – price adjustments that has taken place, but one that is not recognised.” The argument then was that – decline in “quantitative easing”, i.e. cheaper supply of USD, by US Federal Bank caused flight of capital from India, leading to depreciation in rupee value. This sharp decline in the rupee is “no reason to panic”.
Similarly, some columnists like Mihir S Sharma , opined about rupee depreciation as “a chance to fundamentally rework its manufacturing sector” while quoting studies from World Bank – “One World Bank study of 92 episodes of such surges – “significant increases in manufacturing export growth that lasted at least seven years” – showed they followed a massive currency depreciation, which caused a reallocation of resources to exporting sectors.”
For him, it was “a pointless panic” as “The simple fact is that India’s problems have neither a unique cause nor unique consequences; they are representative of what’s facing emerging markets today…Never in the appalling annals of political-economic punditry in India have so many people been so wrong simultaneously. And the worst part is that this comprehensive error is born out of willing ignorance…” As proof he pointed to similar problems being faced by five other emerging economies – Indonesia, Thailand, South Africa, Brazil and Turkey.
Vivek Dehejia, referring to Friedman, argued that “flexible exchange rate provided “insulation” to an economy, like the shock absorber of a car.”
Some editorials comments were terming rupee depreciation as “automatic stabiliser” helping the business cycle bottom out.
However, the narrative showcasing the bright side and “exchange rate optimism” seems to be reverse its forcefulness during 2014 to 2018. Headlines with phrases like “cracks below a level”, “nosedive”, “free fall”, “touching all time low”, “tanks” etc try to signal pessimism about the “weak rupee”. These wordings would obviously be gaming opinions of the people who read them.
To quote from an article here: “The imports become costlier, thus creating vicious circle. India’s foreign debt servicing gets complex with the depreciation of rupee. Higher cost of imports can lead to all-round inflation. Due to high import intensity, even exports can prove to be non-competitive. The CAD worsens. The BOP position gets precarious….Thus, there is no room for complacency on the value of rupee.”
Opinions also seem to be swung to extreme for whom it was “pointless to panic” and pessimism is evident from the choice of words of the same Mihir Sharma who was earlier telling us panicking at the fall of the rupee was pointless. Here, he says, “Unfortunately, while growth is indeed reviving, the macro-economy isn’t looking all that robust. Most worryingly, the rupee is just about the worst-performing currency in Asia this year; some analysts believe that it will, before the end of the year, be cheaper against the dollar than ever before. Others may not be as gloomy but, across the board, they’ve lowered their forecasts for India’s currency….”
Pointing out flaws in the ‘growth model’, Sharma advises the government to let rupee stay high even if “exports struggle”, in a seeming contradiction from earlier stand taken. He even made an accusation that the fall in rupee was “engineered” for success of Make In India.
We were told, just the rupee depreciating is not going to help exports but it will push up inflation.
Another piece here outlines the many ‘dangers of the falling rupee’. It says, “Moreover, currency depreciation has effects that enhance pre-existing vulnerability. One form that takes is inflation. If trade liberalisation has increased dependence on imports for consumption and investment, depreciation by raising the rupee cost of imports would aggravate inflation. Since one of the factors underlying depreciation is an increase in the price of a universal intermediate like oil, the potential for inflation is much higher.”
For all the talk of inflation now, it was in the UPA era when many of the articles defending a weak rupee were written that inflation was sky high and breaking the back of the consumers. Still, a weak rupee was painted as a positive sign. Now, when inflation is about half as that of the UPA era, the red rag of inflation is being waved while writing about the fall of the rupee.
Rupee at 68-70 is much needed correction after relative stability in the exchange rate after 2014. The rupee depreciated almost 32% during the UPA regime, whereas it is almost half of that during the last four years. The fall in rupee value against USD can be attributed to protectionism prevailing in the developed world negatively affecting the rupee value along with much reported global spike in crude oil prices.
This is not to suggest that there is no cause for concern on the rupee’s exchange rate. With enough forex reserves with RBI, better macroeconomic fundamentals, and inflation management the shock can be absorbed. However, how does one manage balance amidst the barrage of reportage and opinion that clearly seeks to drive a set narrative that seems to change tack depending upon who is in power?