NEW DELHI– India should allow the rupee to depreciate to help exports remain competitive, while the RBI should use its ample forex reserves to defend the currency only in a rout situation, industry chamber Assocham said on Sunday.
“Any depreciation in the rupee on account of China-led turmoil in the global financial markets should only be a welcome sign for India, else Indian exports will suffer more at the hands of China and other emerging countries witnessing a correction in their currencies,” Associated Chambers of Commerce and Industry of India (Assocham) said in a statement here.
“India should allow its currency to slide while the Reserve Bank of India (RBI) should use ample foreign exchange reserves to defend the currency only if there is a rout situation. However, there is a distinct possibility that rupee could actually strengthen over the medium term,” it said.
The rupee slid on Friday by 30 paise to a new 28-month low at 67.59 owing to fresh US dollar demand from importers caused by continuous foreign capital outflows.
Meanwhile, the global slowdown has continued to weigh on India’s exports, which have declined for 12 straight months.
On the fall in the value of the Indian rupee, the finance ministry’s mid-term economic review attributed it considerably to the major devaluation of the Chinese yuan.
Assocham said the country must ensure that its exports get back their competitiveness even in the midst of a global slowdown.
The chamber said the major challenge is coming from China in various forms with sizeable influence on the currency valuation.
Yuan devaluation, the third in the last five months, will negatively impact Indian companies that export to China in areas such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade, it said.
“The biggest concern is the steadily deteriorating balance on the merchandise trade account with China,” Assocham president Sunil Kanoria said.
The India-China bilateral trade in 2014-15 stood at $72.3 billion with the balance of trade deficit for India being at $49 billion.
“The latest round of devaluation can make India’s trade imbalance with China even worse. In any case, the deterioration has been rather steady and secular in the last few years with exports to China dropping,” Assocham said.
“Going forward, the situation does not look good; rather it has deteriorated with the Chinese demand for primary goods declining and crash in prices,” it added.
India’s external position has, however, improved during this period.
Forex reserves are a little over $350 billion in November 2015 as compared to a little over $270 billion in July 2013.
Net foreign direct investment (FDI) inflows have increased to $17 billion in the first half of 2015-16 in comparison to $15.8 in the same period last year.
India’s second quarter’s current account deficit logged at a level of 1.6 percent of the GDP.