What is the Right Price for a US Dollar?

The Indian Rupee has recently appreciated, significantly against all major currencies of the world.

The fluctuation in Indian Rupee-US Dollar Exchange Rate has been a matter of great concern for the exporter community as Dollar has depreciated from its peak Rs. 46.89 on 24th July 2006 to a level of Rs. 40.71 on 9th May 2007 (a fall of 13.18%). On 16th May 2002 the Green Buck had been selling at Rs. 49 each piece.

Currently, the importing community seems to be happy. Contrarily, the exporter community led by Commerce Minister Mr. Kamal Nath has been pressurising the Government and Reserve Bank of India to intervene and buy Dollar from the market to curb the appreciation of the rupee vis-a-vis other major currencies, especially US Dollar.

How far pressure of exporting community is justified is to be examined in the backup of the following facts: -

• In 1991, Dr. Man Mohan Singh as Finance Minister intervened in the Forex Market in 2 trenches and US Dollar appreciated from Rs. 16 to Rs. 32, just in a matter of 3 months.
• India had a fully controlled exchange control regime before 1991 and had a very tough time in 1990, as due to lack of foreign exchange, we as a nation were forced to mortgage our Gold Reserve.
• The position has since changed. A price parity research between India and US indicates that most of the products in the US market are about 5 times costlier (on an average) as compared to the Indian market, on the basis of current exchange rate.
• In case rupee appreciates further, the landed price of the imported commodities and other goods would reduce further, which will put necessary downward pressure on the Indian inflationary condition.
• The exports from India are becoming less attractive due to higher cost.
• In case RBI does not intervene by fresh acquisition of Dollar in the market, rupee may significantly appreciate further and may reach Rs. 35- Rs. 30 in 6-12 months.

Now the crucial question is, as to whether RBI and the government should allow the rupee to fluctuate as per the market condition or RBI should intervene to take care of the interest of the exporters and then, also address resultant money supply by utilizing additional market stabilization fund of 30000 crores, allocated to Reserve Bank recently.

It is a hard fact that due to persuasion of the exporting community as well as due to lobbying of Indian industry, RBI has been taming the rupee for last 2-3 years. The Indian domestic industry has long standing apprehension that in view of significant reduction of custom duty rates (fiscal barrier) and withdrawal of almost all-physical control on imports by the government, the Indian domestic industry is being subjected to tough competition from international markets.

A sharp reduction or fluctuation in forex rates as noticed in last 3 months is more killing for the Indian economy, as there is no effective hedging mechanism available with the Indian market. However, an artificial rupee-dollar rate is only helping the international customer at the cost of the Indian domestic customer. Our goods are being exported at an artificially low price, whereas the imports are artificially priced high, thereby impacting the Indian consumer and benefiting the foreign consumer.

Author Information: R S Chawla is a Chartered Accountant based in Canada and regular contributor to various portals as www.b2blounge.com ,. www.canadaupdates.com and www.adklicks.com .