September 19, 2016

Should the Government Devalue Rupee?

The commerce ministry is concerned over the continuous slowdown in exports. Contracting for the second month in a row, India's merchandise exports fell 0.3% to USD 23.5 billion in August on persistent weak demand in developed markets and subdued prices.

In a draft Cabinet note circulated earlier to seek views of different ministries, it has suggested that a mechanism be formulated to ensure the rupee-dollar exchange rate reflect the realistic value of the domestic currency. The ministry has argued that adjustments in exchange rate policy are needed as it is important to increase the competitiveness of the products.

Currently, Indian currency's real effective exchange rate (REER) is viewed as overvalued compared to several countries like Mexico, South Africa, Argentina and Brazil. The REER is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index. By this yardstick, the Indian rupee is overvalued.


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