Does the rupee's value decide whether India can compete?

Every few months the rupee touches a record low against the dollar, and the number leads the bulletins as though a verdict had been handed down on the country. The exchange rate is not a verdict, though. It works better as a pressure valve.

Start with the mechanics. The exchange rate is a price for the rupee relative to other currencies, and people buy rupees for one of two reasons: to buy Indian goods, or to invest in Indian assets. Trade in goods is small next to trade in assets such as shares, bonds, and companies. Investors set the rupee’s price mainly by deciding what those assets are worth, and the quality of Indian goods barely enters into it.

That is why the rupee tends to fall exactly when India would most like it to rise. A shock lands, oil grows dearer or foreign customers pull back, and investors mark down Indian assets. Money leaves, and the rupee slips.

Notice what that slip does to prices. Say the rupee moves from 80 to the dollar to 90. A tin of oil selling for a dollar abroad cost ₹80 in Mumbai and now costs ₹90, even though no policy changed. Every foreign good in India has grown dearer, and buyers switch at the margin: a household picks the Indian brand, a factory finds the Indian steel mill’s quote suddenly competitive. Exporters gain from the same move. A garment factory in Tiruppur that sold its ₹400 shirt in America for $5 now sells it for $4.44, without cutting its rupee price at all. Imports fall, exports rise, and the gap that started the slide closes itself, with no scheme, no ministry, and no meeting.

The same machinery runs in reverse in good times. Money floods in, the rupee strengthens, and the same forces lean against the boom. The exchange rate behaves like a balancer, keeping the economy from leaning too hard in either direction.

China, the argument goes, benefited from an undervalued currency, so why should not India try the same? Grant the premise. China managed its currency from about 2003, and the policy worked: a held-down renminbi made Chinese goods cheaper on every shelf in the world, and factories from Ohio to Tiruppur felt the loss, a real grievance on their part.

The Chinese model still fits India poorly. Holding a currency where a government wants it means controlling the money crossing its border, or investors will move enough of it to overwhelm the effort. China’s closed financial system allows that control, at a serious cost of its own. India has spent thirty years opening its financial markets, and closing them again would mean surrendering the foreign capital that builds Indian factories, just to shave a little off Indian export prices.

India has already run the opposite experiment. For decades the state held the rupee stronger than the market would have set it. Foreign goods stayed artificially cheap, more people wanted dollars than there were dollars to go round, and the state rationed the shortage with permits and quotas. A black market grew in the gap, and devaluation came anyway.

So does the rupee’s value decide whether India can compete? No. A cheaper rupee lowers the price of Indian goods abroad without making them any better or any cheaper to build. Currency depreciation can only buy temporary competitiveness. Only durable competitiveness survives the next time the rupee moves.