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NEW DELHI: India’s stronger currency has become a threat for its growth aspirations, piling pressure on the central bank to aggressively intervene in the foreign exchange market even at the risk of incurring the wrath of the US.
The rupee has risen more than 6 percent this year against the dollar, snapping six consecutive years of depreciation, with the impact magnified by the decline of many competitors’ currencies against the greenback over the same period.
That is weighing on an economy that is struggling to cope with disruption caused by ambiguous rules of a recently launched Goods and Services Tax (GST), and has yet to fully recover from Prime Minister Narendra Modi’s crackdown on “black money”.
While the rupee’s surge is being driven by strong capital inflows lured by India’s economic and political stability, it is making the country’s exports less competitive and is also driving up imports, prolonging a slump in manufacturing.
An exports slowdown dented GDP growth by 2.6 percentage points in the last quarter. Overall economic expansion cooled to 5.7 percent in the June quarter, data released on Thursday showed, its slackest pace in more than three years.
“(The) rupee is now really hurting growth,” said Pronab Sen, the former Chief Statistician of India and now a country director for think-tank International Growth Center. “It is about time India does something about it, else we will have to brace ourselves for an extended spell of weak growth.”
Previously, strong rupee appreciation would prompt policymakers to talk down the currency. But that has been absent under Modi, as many of his cabinet colleagues are keen to project the rising rupee as an endorsement of the Indian leader’s economic stewardship.
But with slowing export earnings threatening jobs and double-digit imports growth hollowing out Modi’s signature ‘Make in India’ program, some officials are calling for action.
In its mid-year economic survey, the finance ministry last month cited exchange rate appreciation as one of the downside risks for Asia’s third-largest economy.
Thursday’s GDP figures have only reinforced those concerns.
“A call will have to be made sooner rather than later whether the economy can afford the rupee at these levels,” said a senior government official.