RBI should let rupee depreciate for help of exports: Assocham

Amid the worries of continuous slide in rupee, the industry body Assocham in its latest paper has said that India should allow its currency to slide while the RBI should use ample foreign exchange reserves to defend the currency only if there is a rout situation. However, there is a distinct possibility that rupee could actually strengthen over the medium term.

Assocham said that any depreciation in rupee on account of China-led turmoil in the global financial markets should only be welcome sign for India, or else Indian exports will suffer more at the hands of China and other emerging countries witnessing correction in their currencies.

The industry body said that India must also ensure that Indian exports need to get back their competitiveness even in the midst of global slowdown. The major challenge is coming from China in various forms with sizeable influence on the currency valuation. The paper further highlighted that Yuan devaluation, third in the last five months, will negatively impact Indian firms which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade. “The impact of this devaluation will depend on the time horizon....However, the short-term impact can be negative in some sectors which also include capital goods among others,' the ASSOCHAM paper on 'Implications of Devaluation of Chinese Yuan’ noted.

It said that the devaluation will make Indian exports expensive to the neighbouring country, affecting the competitiveness. Even in a third country market, the currency devaluation in China can make things difficult for Indian goods since the rupee depreciation has not been sharp enough to give competitive edge to the country's exporters.