ET Now In an interview with ET Now, Madan Sabnavis, Chief Economist, CARE Ratings, shares his views on the rupee and the country's trade scenario. Excerpts:
ET Now: For the last couple of days, we have been talking about the rupee's relative strength and how it is not helping export growth at this juncture given what other economies are doing. Do you think that we not only need domestic push but also export push for our overall growth numbers?
Madan Sabnavis: I have a slightly different view out here because I would tend to believe that if we look at trade data, especially export data for the last 10 years, Indian exports seem to be driven more by global demand conditions rather than by export competitive advantage which comes on account of a weaker rupee. Therefore, we have seen that even in years where rupee has been depreciating, they have not quite managed to make our exports pick up. So my belief is that we would see an uptick in exports only when the global economy recovers in a big way, which means that the various regions where we have our trade relations such as the US, Euro region, Africa, East Asia, there has to be correspondingly commensurate growth coming in all these regions in order to spur our exports. If you look at our exports, the government has been doing all it can as far as FRS facilitation is concerned to ensure it becomes easier for exporters to export. We have seen a relatively stable rupee but I would not say it has been depreciating as much as the other counterparts but given the fact that in the past we have not seen this kind of relationship, I do not think there is a disadvantage. It is more to do with demand conditions because if you look at the composition of our exports, the kind of goods which we were exporting, most of them are demand driven rather than being run on the price advantage or disadvantage. So we will just have to wait for the global conditions to improve and my own sense is that even in the coming year, until there are improvements in the global economic situation, exports are not really going to pick up in a big way.
Mythili Bhusnurmath: You are right on that to some because Chinese exports have also fallen quite dramatically in March and China is a big export engine. Having said that, it is not surprising that Indian exports have not done well but at the same time, unlike the exchange rate reflects the underlying fundamentals, there is going to be a distortion. At the end of the day, you do want the exchange rate to reflect the underlying fundamentals and the real value of the rupee is certainly not where it should be right now. It should be closer to about 65-66. So, is there not a case for the RBI allowing a gentle depreciation of the rupee even though yes capital flows are keeping it artificially strong?
Madan Sabnavis: That is exactly the issue when we are talking of the right value of the rupee because normally when we look at the real effective exchange rate, what we are looking at is more which is based on trade whereas what we are seeing that the underlying strength of the rupee is coming in more because of the capital inflows. So we have seen that on a day to day basis, the days when we have positive capital inflows or rather in case a very stronger rupee tends to strengthen. RBI's position has been very clear that they would not really like to look at any particular value of the rupee as long as things are stable. There is not going to be too much of intervention from the RBI. The RBI is primarily going to work on targeting inflation as far as monetary policy is concerned and is not really going to be worried about the current state of the rupee, which to my mind, is fairly justified given the fact that our trade balance has been generally under control. We are seeing strong capital inflows coming in which should actually mean that the rupee should be strengthening.
Mythili Bhusnurmath: If you look at the numbers, our problem at the moment is a problem of plenty. We do not have enough absorptive capacity. So if you really want to discourage capital flows without imposing any kind of capital controls and a good way to do that is to allow the rupee to depreciate whereas at the moment the "artificial strength" of the rupee encourages the inflow carry trade. You borrow in the US at 1% or less, invest in India and even especially in debt instruments and look at clear money for chance. So would that not be a good way of discouraging capital flows if you allow the rupee to depreciate?
Madan Sabnavis: What you are saying would definitely hold in case they allow it to happen. But again I would go back to the argument I made at the beginning saying that by merely letting the rupee to depreciate, I cannot really reach a situation where I will have my exports increasing because in the past we have seen it has not really led to increase in exports. So in that case, we may just be fuelling a bit of imported inflation by letting the rupee depreciate which probably, it is a kind of a choice which the central bank has to make and just letting the market forces and letting the exchange rate move in the appropriate direction is probably the right course for us.
Mythili Bhusnurmath: It is a tough choice for the central bank to make but would you think the strength of the rupee has also something to do with the increase in gold imports that we have seen because inflation has come down and the argument so far was that gold imports have picked up because inflation was high but now we have seen inflation trending down and gold imports have not decreased. On the contrary, they have increased. So could the strength of the rupee have something to do with gold imports increasing?
Madan Sabnavis: That is definitely one factor but again we have reached this particular season, again we have this festival, marriage season which is coming through where typically there would be an increase in demand for gold and that is just what is getting manifested where we are seeing that the gold imports are going up. So even in the month of April as well as May we could expect an increase in the import of gold. We should remember that the government as far as possible is trying to make sure that they have fewer restrictions in terms of imports of gold, they are trying to make sure that things go on in an orderly manner.
So in this kind of a market force oriented determination of exchange rates what is happening is something which is bound to happen at these kind of times just like when at times when the rupee starts depreciating, we will have the converse happening so the right thing is let things go the way the market dictates and not to try and really guide the market forces because otherwise there are times when you are not happy when the rupee is depreciating and the other times we are not happy when the rupee is appreciating. So just letting it like both of them do have their consequences, they do have their repercussions, so the right thing to do is just let the market play out.
ET Now: For the last couple of days, we have been talking about the rupee's relative strength and how it is not helping export growth at this juncture given what other economies are doing. Do you think that we not only need domestic push but also export push for our overall growth numbers?
Madan Sabnavis: I have a slightly different view out here because I would tend to believe that if we look at trade data, especially export data for the last 10 years, Indian exports seem to be driven more by global demand conditions rather than by export competitive advantage which comes on account of a weaker rupee. Therefore, we have seen that even in years where rupee has been depreciating, they have not quite managed to make our exports pick up. So my belief is that we would see an uptick in exports only when the global economy recovers in a big way, which means that the various regions where we have our trade relations such as the US, Euro region, Africa, East Asia, there has to be correspondingly commensurate growth coming in all these regions in order to spur our exports. If you look at our exports, the government has been doing all it can as far as FRS facilitation is concerned to ensure it becomes easier for exporters to export. We have seen a relatively stable rupee but I would not say it has been depreciating as much as the other counterparts but given the fact that in the past we have not seen this kind of relationship, I do not think there is a disadvantage. It is more to do with demand conditions because if you look at the composition of our exports, the kind of goods which we were exporting, most of them are demand driven rather than being run on the price advantage or disadvantage. So we will just have to wait for the global conditions to improve and my own sense is that even in the coming year, until there are improvements in the global economic situation, exports are not really going to pick up in a big way.
Mythili Bhusnurmath: You are right on that to some because Chinese exports have also fallen quite dramatically in March and China is a big export engine. Having said that, it is not surprising that Indian exports have not done well but at the same time, unlike the exchange rate reflects the underlying fundamentals, there is going to be a distortion. At the end of the day, you do want the exchange rate to reflect the underlying fundamentals and the real value of the rupee is certainly not where it should be right now. It should be closer to about 65-66. So, is there not a case for the RBI allowing a gentle depreciation of the rupee even though yes capital flows are keeping it artificially strong?
Madan Sabnavis: That is exactly the issue when we are talking of the right value of the rupee because normally when we look at the real effective exchange rate, what we are looking at is more which is based on trade whereas what we are seeing that the underlying strength of the rupee is coming in more because of the capital inflows. So we have seen that on a day to day basis, the days when we have positive capital inflows or rather in case a very stronger rupee tends to strengthen. RBI's position has been very clear that they would not really like to look at any particular value of the rupee as long as things are stable. There is not going to be too much of intervention from the RBI. The RBI is primarily going to work on targeting inflation as far as monetary policy is concerned and is not really going to be worried about the current state of the rupee, which to my mind, is fairly justified given the fact that our trade balance has been generally under control. We are seeing strong capital inflows coming in which should actually mean that the rupee should be strengthening.
Mythili Bhusnurmath: If you look at the numbers, our problem at the moment is a problem of plenty. We do not have enough absorptive capacity. So if you really want to discourage capital flows without imposing any kind of capital controls and a good way to do that is to allow the rupee to depreciate whereas at the moment the "artificial strength" of the rupee encourages the inflow carry trade. You borrow in the US at 1% or less, invest in India and even especially in debt instruments and look at clear money for chance. So would that not be a good way of discouraging capital flows if you allow the rupee to depreciate?
Madan Sabnavis: What you are saying would definitely hold in case they allow it to happen. But again I would go back to the argument I made at the beginning saying that by merely letting the rupee to depreciate, I cannot really reach a situation where I will have my exports increasing because in the past we have seen it has not really led to increase in exports. So in that case, we may just be fuelling a bit of imported inflation by letting the rupee depreciate which probably, it is a kind of a choice which the central bank has to make and just letting the market forces and letting the exchange rate move in the appropriate direction is probably the right course for us.
Mythili Bhusnurmath: It is a tough choice for the central bank to make but would you think the strength of the rupee has also something to do with the increase in gold imports that we have seen because inflation has come down and the argument so far was that gold imports have picked up because inflation was high but now we have seen inflation trending down and gold imports have not decreased. On the contrary, they have increased. So could the strength of the rupee have something to do with gold imports increasing?
Madan Sabnavis: That is definitely one factor but again we have reached this particular season, again we have this festival, marriage season which is coming through where typically there would be an increase in demand for gold and that is just what is getting manifested where we are seeing that the gold imports are going up. So even in the month of April as well as May we could expect an increase in the import of gold. We should remember that the government as far as possible is trying to make sure that they have fewer restrictions in terms of imports of gold, they are trying to make sure that things go on in an orderly manner.
So in this kind of a market force oriented determination of exchange rates what is happening is something which is bound to happen at these kind of times just like when at times when the rupee starts depreciating, we will have the converse happening so the right thing is let things go the way the market dictates and not to try and really guide the market forces because otherwise there are times when you are not happy when the rupee is depreciating and the other times we are not happy when the rupee is appreciating. So just letting it like both of them do have their consequences, they do have their repercussions, so the right thing to do is just let the market play out.
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