Depreciating Currency for Economic Health: A Myth or Reality?

Abstract

Economists across India including the Chief Economic Advisor (CEA) to the Government of India (GOI), Arvind Subramanian believe that interest rate cut would push up exports and improve the economic health of the country. Arvind pleaded to bring real effective exchange rate (REER) of rupee to its original level for making it competitive. He liked the Governor of the Reserve Bank of India (RBI) to follow the prescribed line. On the other hand the RBI Governor, Raghuram Rajan was in favor of fighting inflation. This paper aims to analyze if depreciation of Indian currency would increase exports and improve India’s trade balance. This article tries to compile the historical data on movement of Indian currency against the US dollar from 1913 to September 9, 2015. It also compiles data on export and import performance of India since 1991 to 2008. The data finds that the currency was depreciated by 765 times in the last 100 years. Even during April, 2014 to September 2015, Indian rupee got depreciated by over 10 per cent. But, export performance of India has been in the negative zone for the 10th month in a row. This paper would like India’s policy makers to take a holistic view of the economy and to toe into scientifically prescribed path rather than depreciating currency to revive Indian Economy.