In September 2013, when Raghuram Rajan took over as the chief of India’s central bank, the Indian rupee had hit a new low. It was Rs 62 per dollar, having fallen from the previous year average of Rs 55 per dollar.

The value of one rupee fell from 1.8 US cents to 1.6 US cents, the depreciation being 11.1%. In fact, the rupee had been steadily coming down in value since 2011.

There were fears the Indian rupee would slide down much more rapidly if drastic measures were not taken.

The RBI’s drastic measures under the stewardship of Rajan are now well known. He took firm steps to control inflation, he raised the interest rate and his inflation targeting policy was adhered to despite contrary signals from the government. The outflows of foreign exchange reserves of about $15.8 billion in 2013-2014 were not only quickly reversed but fresh inflows were induced as confidence in the Indian economy was restored. The world’s investors know Rajan in his previous avatar as a chief economist with the International Monetary Fund. The faith in him continued and was unwavering during his three-year tenure.

Fast forward four years to September 2017. We have good news on the foreign exchange reserves front, with reserves going to hit a new high. The Indian rupee is also becoming stronger day by day.

Rajan, now on a visit to India, launched his latest book in Chennai. On that day (September 7), the exchange rate was Rs 64.01 per dollar, much higher than what it was four years ago, although lower than Rs 67.30 of the last fiscal year. Rajan paid handsome tribute to his successor Urjit Patel and congratulated him for continuing the policies for stabilisation of the external and internal values of the rupee by targeting inflation, which is the goal of sound central banking.

The test of success is the accretion to foreign reserves. India’s foreign reserves have risen from around $268 billion in September 2013, when Rajan took over, to $392 billion when Rajan returned to launch his book.

Morgan Stanley predicts it will soon touch $400 billion much before mid-September.

Rapid addition to India’s reserves is one of the strongest in Asia in the last 12 months. Foreign direct investment and institutional capital inflows on a 12-month basis were heavy at $63 billion and $17 billion. No doubt the credit off-take during the last nine months is low, which is more due to uncertain effects of the November 2016 demonetisation decision and the initial impact of India’s goods and services tax rollout.

The pace of foreign exchange accumulation has been noted to be the strongest since 2015. This has also been one of the strongest in Asia ex-Japan in the past 12 months, the Morgan Stanley report adds.

Rising value of Indian rupee

Does the rising Indian rupee hurt exports? The usual refrain of India’s exporters is their exports are affected by the increasing value of the rupee, which makes their exports unattractive to foreigners.

Rajan’s policies of stabilisation of Indian currency pursued during his tenure and his reiteration of the need for continuous attention to stabilising the value of rupee have been misconstrued by various interest groups.

While exporters think stabilisation means keeping nominal exchange rate low for export promotion purposes, policy makers feel that stabilisation means keeping a high exchange rate, which reflects the strength of the nation.

Neither is true.

Months ago, when Nirmala Sitharaman as commerce minister wanted the RBI to keep a low Indian rupee, she was quickly reminded that export competitiveness is influenced by various factors, including quality, the foremost being the price, primarily determined by productivity. Export competitiveness does not stem forth from nominal exchange rate but is reflected in another kind of exchange rate.

Real exchange rate

That is known as the real exchange which is derived as the product of nominal exchange rate (expressed as the value of domestic currency in terms of foreign currency) multiplied by the ratio of domestic price level to foreign price level.

Given the foreign price level (beyond the control of any government) and given the nominal exchange rate (determined by supply of and demand for foreign exchange), it is the domestic price level (which is the goal of any central bank worth the name and hence fully under control by domestic policies, fiscal and monetary policies), which influences exports. When all other given, domestic price level shoots up, real exchange rate shoots up too, to the detriment of exports.

Zimbabwe is a textbook case, a staple for teachers lecturing to students of international economics on the subject.

Sitharaman eventually clarified that she did not tell a reporter that the government was discussing devaluation. The finance ministry denied that it had any discussions on devaluation. That was the day when the rupee was at a high of 67.03 per dollar. The finance ministry took pains to dismiss “lobbying by struggling exporters seeking a competitive boost from a cheaper rupee,” a needless hope fanned by commerce ministry.

We have the data assembled here, all sourced from RBI Bulletin’s monthly issues, including the latest.

Table 1 below gives nominal exchange rates: one value of US dollar in terms of rupees; another, value of rupee in terms of US cents.

Period Nominal Rs/US$ Change (%) Nominal US$/Rs Change (%) 2012-13 53.44 – 0.019 – 2013-14 58.60 9.66 0.017 -8.81 2014-15 61.03 4.15 0.016 -3.98 2015-16 64.15 5.12 0.016 -4.87 2016-17 67.20 4.74 0.015 -4.53 April, 2017 64.56 -3.92 0.015 4.08 May, 2017 64.43 -0.20 0.016 0.20 June, 2017 65.45 1.58 0.015 -1.56 July, 2017 64.45 -1.53 0.016 1.55 Aug, 2017 63.99 -0.71 0.016 0.72 September 17, 2017 63.99 0.00 0.016 0.00

Table 2 presents real exchange rate of Indian rupee (as defined before). Table 2 provides real exchange rates in two sets: 36 currencies of the world, in which India participates in trading activities; and six major currencies of the world (US dollar, the British pound, the Euro, Japanese yen and the Chinese yuan).

Table 2 36 Currency Trade based 6 Currency Trade Based Index REER Change (%) Index REER Change (%) 2013-14 103.27 – 112.97 – 2014-15 108.94 5.20 119.2 5.51 2015-16 112.07 2.79 122.71 2.94 2016-17 114.5 2.12 125.99 2.67 April, 2017 120.08 4.65 132.67 5.30 May, 2017 118.79 -1.09 132.51 -0.12 June, 2017 118.25 -0.46 131.41 -0.83 July, 2017 117.89 -0.31 130.07 -1.02

The more relevant are the real exchange rate of rupee calculated in regard to six major trading partners of India.

Variations in real exchange rate

While nominal exchange rates show large annual variations in terms of percentage change, real exchange rate variations are much less. It is obvious that there is no need for any devaluation which was talked about last September.

In fact, any devaluation would only make imports more expensive, the most important and vital components being petroleum crude and other petroleum products and machinery and capital goods.

The impact on domestic price level through imported inflation will be substantial.

India has adopted a floating exchange rate regime. It is not perfect freely, flexible exchange rate. It is a dirty float with interventions, which are now acceptable as US and Japan do it.

Fluctuations in nominal exchange rate are normal in a free market. One has to live with it.

Only when the fluctuations are beyond reasonable margins and when things go beyond the acceptable levels, often due to the worsening balance of payments positions or wild fiscal and monetary policies of the Mugabe kind, devaluation can be thought of.

Talking about cutting interest rate and making exchange rate cheaper for foreigners is irresponsible.

Any flippant talk of devaluation would only damage India’s reputation as a credible, mature emerging economy, which has been so assiduously built during Rajan’s three-year tenure and now being continued under Patel’s tenure.

In sum, business and political leaders should know RBI’s interest rate policy is not directed towards nominal exchange rate stabilisation. It is towards price stability, which takes care of exports as well, through adjustments in real exchange rate.

T.K. Jayaraman is a research professor under International Collaborative Partner programme at University of Tunku Abdul Rahman, Kampar, Perak, Malaysia.