Prof. D Mukhopadhyay
Of late, the global economy including India is seen to have been passing through a ‘currency war’. The world is witness of intense competition as a consequence of with globalization of capital flow, development of international financial markets and prominent advancement taken place in information and communication technology. Economic history evidences that Italy, Spain, Greece, Ireland, Portugal and some of the African countries apply periodically the theory of currency devaluation inorder to boostup their economies. Many countries are observed to beapprehending that ‘currency war’ is expected to rule the international financial markets in full swing.Let us understand the backdrop of this contemporary context. INR has been on continuous depreciating mode against USD and it crossed INR 80 per USD in recent past. The financial implication of INR depreciation makes imports more dearer and exports competitive in the international markets. More imports mean more outgo of forex and India’s forex reserve shall remain unsatisfactory as long as forex inflow is not greater forex outflow. As per available statistics, Indian forex reserve has been shrunk by $50 billion between September, 2021 and July 2022. The INR-USD Exchange of INR 73.60 in September, 2021 is now INR 80 implying Rupee depreciation by 8.70% during past 10 months whereas annual depreciation had been between 3% to 3.5%.
Let us have a glance on Balance of Payment (BoP) scenario at this juncture. The BoP Account consists of two Sub-Accounts known as the Current Account and the Capital Account. The Current Account consists ofthe Trade Account and the Invisibles Account. The Trade Account accounts for exports and imports of goods and export and imports of services are accounted for in the Invisibles Account. It is worth mention that the BoP is always balanced. India had a Trade Deficit Balance to the tune of (-) $189.50 billion in 2021-2022 Fiscal Year. However, the Invisibles Account showed a surplus balance to the extent of (+) $150.70 billion leaving net deficit balance of (-) $38.80 billion. The Capital Account inflow was $103.10 billion andoutgo on account of Foreign Portfolio Investors (FPI) was (-) $16.80 leaving a surplus of $86.30 billion leading to a total change in Forex Reserve of (+) $47.5 billion. At this point, the surplus BoP may lead to INR appreciation against USD implying change in buying behaviours and investing preferences of people since export becomes cheaper and import is dearer. Consequently, trade deficit will become narrower or even evaporate completely. On the contrary, Reserve Bank of India (RBI) may like to make Indian forex reserve healthier by removing the surplus USDs from the market and ensuring resilience in INR and USD exchange ratio.This is important to bear in mind that the Indian import is significantly USD dominated and dearer imports creates pressure on forex reserve, consequently affecting the Current Account Balance. As regards exports, it is likely to generate mixed economic implications. USD is involved in bilateral trades between India and the USA whereas Euro is relevant for India’s trades with the European Union.Experts are of the view that the current global economic scenario is likely to lead to ‘currency war’ and almost every developing economy including India is bound to come under the claws of currency mismanagement having past precedence. The phrase-‘currency war’ is a decade old economic phenomenon coined by Mr Guido Mantega, the Brazilian Finance Minister, in September 2010 in response to ‘quantitative easing’ in the United States. An unusual appreciation in one or more countries’ currencies make those country’s exports less competitive in international markets, while a frequent depreciation in the remaining countries’ currencies raises the cost of imported products and makes it difficultfor the respective governments to repay theborrowed loansin foreign currencies.
India had devalued INR earlier also and the most prominent devaluation was in1966 immediately after 1965-Indo-Pak War. Currency war emerges out of mismanagement of currencies at international level and it creates economic imbalances.The current form of currency war benefits one country against depreciated currency of other. It seems to be a ‘zero sum game’ in the international market. Now answer toquestion which country wants to remain a looser is probably none and that is why it takes the form a war. The free-market economies such as India, Brazil, Argentina, Spain, Greece, Italy, Portugal etc experience economic vulnerability under the dominant influence of currency war. Under the circumstances, central banks like Federal Reserve, Peoples’ Bank of China, Central Bank of Japan etc emerge to be gainers with transient whereas emerging market driven economies suffer from financial casualty.’ Currency war’ is a serious issue particularly to the emerging free markets and the countrieswith the status of soft currency economies are the worst suffer from adverse effects of currency war.
The most important strategy for economy management is to ensure resilience in the value of currency which becomes a challenge to India and the similar countries. India is much concerned about taming inflation and adopted the hard money lending policy which is usually recession prone.India and similar countries are attributed with less powerful currencies which may invite recession if timely measures are not adopted. Moreover, it will tell upon foreign exchange reserve disproportionately. Economies like India are not capable enough to regulate competitiveness of their products and services in the international markets compared to the economically advanced countries like China, Japan, USA, Germany, France etc. Moreover, it is undeniable that the hard money lending policies of giant economies such as US, China, Japan are not free from being the contributory influence over the likelihood of global recession in near future.
In view of globalisation, economic development has become a priority of cooperation and the sovereign states should derive benefits from their participation in international market.International market is an inter connected state of economy of the sovereign countries beyond borders. Interconnectedness takes careof the currencies of respective countries. In current globalised marketscenario, it is tounderstand that after an international transaction takes place, it must follow an internationally acceptable currency for transaction and thismechanism is administered through the exchange rate(s) among the recognised currencies. The exchange rate is the ratio at which one unit of the currency of one country can be exchanged for that of another country. In international monetary economics, there are three main types of exchange rates such as floated exchange rate, fixed exchange rate and pegged exchange rate. By the end of the Bretton Woods System of fixed exchange rate interms of the currencies used to be pegged to the value to the gold. The floated exchange rate also known the flexible exchange rate which comes under the reference. Under floated exchange rate system, the value of the currency goes on fluctuating in accordance with foreign exchange market functioning by the forces of supply and demand of the concerned currencies. However, the main recognised currencies across the world apply a managed float implying the sovereign states usually intervene in the foreign exchange market in order to influence the resilience in value of their currencies though the action of their central banks such as RBI incase of India. The rate at which the domestic currency can be exchanged determines the price of products and services in the international markets.
Exchange rates are of utmost importance in price competition. Accordingly, determination of an exchange rate policy has an important role in formulating strategy for economic growth of the concerned countries. Moreover, devaluation boosts up exports but it develops negative economic spiral if a country participates in currency devaluation competition. Currency devaluation of awar like characteristic simply adversely affects normal functioning of the world economy. ‘Currency War’ denotes competitive currency devaluation and it cannot be a long run economy management strategy. The participating countries in international trade aim at gaining an economic advantage over othercountries by causing the exchange rates of their currencies tofall against other currencies.Currency fluctuation is the result of floating exchange rate. India had fixed exchange rate policy till 1973 which was replaced by the floating exchange rate system there after and since then, Indian currency hasbeen fluctuating persistently. Lack of confidence of foreign investors in Indian economy is one of the reasons of fluctuation in Indian currency value. Uncertainty and lack of transparency ingovernmental and regulatory body’s policies generate more risks exposure in the minds offoreign investors. Consequently, FDIs started withdrawing money from Indian market for investing in advanced economies like US.
Ministry of Finance, Government of India is fiscal policy formulator and RBI is the national monetary policy maker and money market regulator. RBI should not subscribe to the hard money lending theory for long as it may shrink economic activities contributing to excessive unemployment, drop in outputs, businessclosures, bankruptcies and economic slowdown is the ultimate danger of recession. India is trying to counter Federal Reserve by raising interest rates so that the INR does not lose much against USD.Government of India should boost up exports by adopting fiscal measures such as tax and duties incentives in direct and indirect taxes, encouraging investors inreal and infrastructural sectors, promoting manufacturing sectors of MSMEs andlarge size organizations as well keeping in view the factors suchas cost of production and quality aspects in order to make the products and services competitive in the international markets. Employment generation, export increase and decrease in imports to the possible extent can make the economy vibrant.
(The author is former Interim Vice Chancellor SMVDU, Katra)
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