The Indian currency has been relatively stable recently. The dark days of 2013 seem to behind us. Back then the Rupee had fallen to nearly 70 to the US dollar. The efforts of the RBI as well as curbs on Gold imports stopped the fall. Then the euphoria due to the change in government took over. The Rupee rose as high as 59 to the dollar before stabilising around 62-65 levels. The fall in global commodity prices and huge FII inflows have certainly helped.
However, things could now be changing. With the US dollar gaining strength many emerging market currencies have come under pressure. If the US Fed sticks to its intention of raising US interest rates in September, the Rupee too could be vulnerable. But shouldn't currency weakness help India's exports? Conventional wisdom would say yes. Unfortunately, this has not been the case over the last few years.
It is common knowledge that India's exports (excluding software services) have not taken off. A weak currency has not compensated for poor productivity and high labour costs. If the experience of other emerging economies is to be considered, there is not much hope for India's exports. As per an article in the Wall Street Journal, currencies of many emerging economies have hit multi year lows. But their exports have not grown. Instead, exports have fallen so much that many nations are trying to put curbs on imports!
Why is this happening? The simple answer: poor demand in developed countries. Over the last two decades or so, most of the consumption of in the developed world was credit-based. That phase ended in 2008 with the global financial crisis. Falling demand, has led to a crash in exports along with a fall in global commodity prices. Many developing countries with 'export-lead' models of economic growth are now in the doldrums.
We don't expect the situation to turn around any time soon. We believe that there is a good lesson for India in all this. A weaker Rupee will not help boost India's exports. In such a weak demand environment, only the fittest will survive. Thus, the government would do well to focus on issues such as helping India's manufacturing sector move up the value chain and improving labour productivity. These initiatives have more potential than a weaker currency to ensure the success of programs like 'Make in India'.