Rupee swings on devaluation buzz

Currency settles down after finance and commerce ministries deny meeting next week

The rupee pared losses after a day of high drama that saw the finance ministry denying reports that the government may discuss a plan to devalue the currency.

The rupee had risen to as high as 67.07 per dollar earlier in the day after a television channel reported that the finance and commerce ministries would discuss a calibrated devaluation of the rupee on September 20 to boost exports. Later, a wire agency quoted Commerce Minister Nirmala Sitharaman confirming this.

The finance ministry, however, was quick in its response. “The value of rupee is determined by the market and there is no plan to change policy,” Economic Affairs Secretary Shaktikanta Das told reporters. “Reports that the government wants to devalue the rupee are false.”

Sitharaman also tweeted that she had not said that the government was discussing a devaluation. But her comments stopped short of denying the commerce ministry was weighing such a proposal. After the denials, the rupee started recovering and ended the day at 67.02 per dollar — a two-week low. Sources in the ministry, however, said it was insisting on a correct value of the rupee against other major currencies of leading trade partners. They are also planning to make a case for this with the finance ministry. But, no plan for devaluation was afoot yet.

Devaluation is a policy of reducing the currency value against foreign currencies. Depreciation refers to change in the value because of market forces. The rupee was last devalued in two phases in the early 1990s, when India was hit by a balance of payments crisis. It was first devalued from ~19.64 to the dollar in March 1991 and then to ~31.23, a year later. The total devaluation was 59.01 per cent.

At present, commerce ministry officials said they were pressing for better exchange rate policy, along with the alignment of freight rates with global standards and a liberalised visa regime to boost shipments as there has been a continuous fall in the merchandise exports.

The ministry had earlier also proposed a mechanism to ensure that the rupee-dollar exchange rate reflected the realistic value of the domestic currency and circulated a Cabinet note in June to seek views of other ministries.

According to the proposal, such a mechanism, which would involve officials from the commerce ministry, the finance ministry and the Reserve Bank of India, should be under the department of economic affairs in North Block.

“We have to adjust our exchange-rate policy. This is very important to increase competitiveness of our products. The exchange-rate policy should be based on inflation differential and trade deficit,” a commerce ministry official said.

However, finance ministry sources said the proposal was rejected outright by Finance Minister Arun Jaitley.

Sources in the commerce ministry suggested the ministry might reach out to the finance ministry on the issue again. The commerce ministry had always supported a move to properly evaluate the current value of the currency, rather than supporting outright devaluation, said one source.

The possibility of such a meeting has heightened after the issue was been debated in public. Commerce ministry sources refused to comment over the possible date of such a meeting. A finance ministry official, however, told Business Standard there is no such meeting scheduled on September 20. “Commerce Ministry pushes for all these things. There is no proposal to devalue,” a key finance ministry official said.

“Exporters would have come to the commerce ministry with this issue. However, there is nothing to discuss from our side,” he said.

The Cabinet note, floated by the commerce ministry in June, referred to a study by the economic policy think tank, Indian Council for Research on International Economic Relations, which had pointed out that as of March, 2015, the rupee was 10 per cent overvalued against the US dollar.

Professor Jaimini Bhagwati, one of the authors of the study, had told Business Standard, “We need to have a fairly balanced currency, which has implications across trade, investments and income. It is important to assess the conditions of the currency and appropriately value it, moving away from the debate over whether it should be weakened or strengthened.”

Bhagwati had pointed out the current time may be opportune for revaluating the rupee as oil prices were still low. Experts cautioned that weakening the value of the rupee would make imports costlier as well.