- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
I rarely cross swords with Shankar Acharya, former chief economic adviser and one of the savviest observers of the Indian scene. But I must do so on the exchange rate. Contrary to what he and some other analysts claim, the rupee is not over-strong and is not hurting exports and manfacturing. Exports rose 26.7% in April-November, while imports rose only 24%. This would be impossible if the rupee was over-strong.
Since 1993, the Reserve Bank of India has intervened in forex markets to keep the real effective exchange rate (REER) of the rupee from appreciating. Acharya feels that this approach kept the economy on track, but now a strong rupee threatens derailment.
He cites Goldman Sachs' prediction that the current account deficit (CAD) will touch 4% of GDP in 2010-11 and 4.3% the year after. He attributes this to "the sharpest ever increase in the real effective exchange rate of the rupee in a 12-month period (of 18%, March 2009 to March 2010)."
The accompanying table lists fluctuations in the RBI's two measures of REER, one based on a six-currency basket (all hard currencies) and the other on a wider 36-currency basket. After fluctuating around an index level of 100 for over a decade, the REER (six-currency basket) shot up to 112 in 2009-10 and further to 118 in April-November 2010.
The other REER (36-currency basket) averaged 98 in April-November 2010, a slight depreciation since 1993. However, by this measure, the REER was not constant in the last two decades. It depreciated gradually from 100 in 1993 to 85.89 in 2006-07, then rose to 89.85 in 2007-08, sank again to 84.6 during the Great Recession, and has now appreciated sharply to 98.
Which of the two measures is more relevant? Some will back the six-currency basket, since most trade is designated in these currencies. But India's exports are typically very different from those exported by the big six economies. Rather, India's main competitors are other developing countries, which figure in the 36-currency basket.
Hence this is more relevant for our exports. It suggests the REER has not appreciated since the 1990s. It has indeed appreciated sharply in the last 18 months. But this is mainly a reversal of the rupee's fall during the Great Recession. Today's REER of around 98 is only modestly above the pre-recession level of 94 in 2007-08.
Acharya wrote in September, "Goods exports, which had risen to 18% of GDP in the first half of 2008-09, helped by the global commodity boom, not only fell to 13% of GDP in the second half of the year as global trade plummeted post-Lehman, but pretty much remained there in the subsequent six quarters. Exports of $50.7 billion in the first quarter of 2010-11 were running 12% lower than two years ago.
In contrast, imports, which had also peaked in the first half of 2008-09 and dropped sharply in the second half, have grown quite strongly, from the trough of 20% of GDP in Q4 of 2008-09 to an estimated 25% of GDP in Q2 of 2010-11. This means that as India's good recovery from the "growth recession" of 2008-09 has sucked in more imports, the trade deficit has widened to above 10% of GDP in the current quarter."
Since 1993, the Reserve Bank of India has intervened in forex markets to keep the real effective exchange rate (REER) of the rupee from appreciating. Acharya feels that this approach kept the economy on track, but now a strong rupee threatens derailment.
He cites Goldman Sachs' prediction that the current account deficit (CAD) will touch 4% of GDP in 2010-11 and 4.3% the year after. He attributes this to "the sharpest ever increase in the real effective exchange rate of the rupee in a 12-month period (of 18%, March 2009 to March 2010)."
The accompanying table lists fluctuations in the RBI's two measures of REER, one based on a six-currency basket (all hard currencies) and the other on a wider 36-currency basket. After fluctuating around an index level of 100 for over a decade, the REER (six-currency basket) shot up to 112 in 2009-10 and further to 118 in April-November 2010.
The other REER (36-currency basket) averaged 98 in April-November 2010, a slight depreciation since 1993. However, by this measure, the REER was not constant in the last two decades. It depreciated gradually from 100 in 1993 to 85.89 in 2006-07, then rose to 89.85 in 2007-08, sank again to 84.6 during the Great Recession, and has now appreciated sharply to 98.
Which of the two measures is more relevant? Some will back the six-currency basket, since most trade is designated in these currencies. But India's exports are typically very different from those exported by the big six economies. Rather, India's main competitors are other developing countries, which figure in the 36-currency basket.
Hence this is more relevant for our exports. It suggests the REER has not appreciated since the 1990s. It has indeed appreciated sharply in the last 18 months. But this is mainly a reversal of the rupee's fall during the Great Recession. Today's REER of around 98 is only modestly above the pre-recession level of 94 in 2007-08.
Acharya wrote in September, "Goods exports, which had risen to 18% of GDP in the first half of 2008-09, helped by the global commodity boom, not only fell to 13% of GDP in the second half of the year as global trade plummeted post-Lehman, but pretty much remained there in the subsequent six quarters. Exports of $50.7 billion in the first quarter of 2010-11 were running 12% lower than two years ago.
In contrast, imports, which had also peaked in the first half of 2008-09 and dropped sharply in the second half, have grown quite strongly, from the trough of 20% of GDP in Q4 of 2008-09 to an estimated 25% of GDP in Q2 of 2010-11. This means that as India's good recovery from the "growth recession" of 2008-09 has sucked in more imports, the trade deficit has widened to above 10% of GDP in the current quarter."
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
- http://www.PaisaLive.com/register.asp?707956-2948661
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