The Hindu Business Line : Rupee definitely trended south

Chennai, June 29 Every time the rupee rises or falls for a few weeks in a row, pessimists or optimists begin brooding or hoping that it will never fall or rise again.

These hopes or fears are as ephemeral as the short-term fluctuations on which they are based. The best guide for the years ahead is the track record of the rupee over the past 16 years. And this clearly shows that, despite the occasional hiccup, the rupee will be steered downwards, year after year; so that a broad-based increase in profit margins can stimulate exports of goods and services until they are large and sustained enough to guarantee us a safe passage over stormy seas, sudden spikes and sharp gradients. Until India will no longer be forced to rely on fickle capital flows to see it through.

Three important qualifications are necessary. One, the difference between trends and fluctuations, has already been taken on board. As for the second, it is all very well to argue for ‘allowing the rupee to appreciate to help offset the increase in the price of crude’. But this offset would over a period of time itself be offset by a slowdown in exports, so we would find ourselves right back in square one.

The final, critical point is that you can ‘steer’ the rupee slowly down vis-a-vis only one currency or currency group (e.g. the dollar, and the mid-East currencies that have so far remained pegged to it). Once you have done this, the direction and pace of the rupee vis-a-vis other currencies will automatically get determined by the trend rates of exchange between these other currencies and the one you have decided to hitch your fortunes to. Knee-jerk reactions, in response to the special-interest pleas of this or that presently important industry, can lead you to climb abroad a sinking ship.

The accompanying chart makes it crystal clear that from 1991 to 1997 India used the US dollar as ‘the pole star’ while stepping from administratively-determined to market-oriented rates of exchange. But this position underwent a change a few years down the line.

Americans routinely set their ACs or heaters at 68 degrees Fahrenheit. But the real ‘underlying’ is immediately obvious to any one who knows that this translates into exactly 20 degree Centigrade. Similarly, though the 10 per cent re-valuation of the rupee in 2007 (from Rs 44 per US dollar on March 16 to Rs 40 on July 6) seemed at first sight to have been calibrated with the dollar as the benchmark, and though even today the RBI reports forex reserves in dollar-denominated terms, the data clearly show that the rupee was ‘unhitched’ from the dollar as far back as 2002.

Why, then, does the IT/ITES sector seem to be still fixated on the dollar?

One reason is that even some of the IT biggies have got ‘hooked’ to the easy money they were able to pick up all these years from low-end, low-skill, labour intensive IT services, simply because of the wage cost differential. Even casual employees at McDonalds or Kentucky Fried Chicken counters in New York City rake in a minimum wage of $ 7.15 an hour. A five-day, 40 hour week fetches them $15,000; i.e. two to two-and-a-half times as much as a fresh B.Tech. in the IT sector.

Another part of the answer is that companies like Wipro have been rapidly diversifying their activities for more than two years; outside the US, outside China, and even within India. Finally, many small and middle rung IT/ITES players just don’t have the wherewithal to begin afresh.

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