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20 September 2018, Gateway House

Reversing a falling rupee

Economist Surjit S. Bhalla, who sits on the Prime Minister’s Economic Advisory Council, says all currencies, not just the rupee, have fallen against the U.S. dollar. Speaking to Gateway House’s Manjeet Kripalani, he elaborates on some diplomatic and domestic tools to stem the fall, even in an election year

Member, Indian Prime Minister’s Economic Advisory Council

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Manjeet Kripalani (MK): On the cause of the rupee’s decline.

Surjit S. Bhalla (SB): The single biggest reason: the strength of the dollar. If only two or three currencies were falling in value, we could look at the specific causes. In this instance, the currencies of all economies, be they developing, advanced, emerging or under-developed, have weakened against the almighty dollar. It’s an across-the-board change.

The second reason is higher oil prices. The fact that oil prices are at $78-$79 a barrel in the last two or three months doesn’t help the growth rate of most economies.

MK: On the use of diplomatic tools and domestic financial instruments that India can leverage to manage the fall, in the long and short term.

SB: Regarding diplomatic tools, the U.S. will begin imposing sanctions against Iran in a couple of weeks. We’ve had a 2+2 meeting with the US secretary of defence and secretary of state and our counterpart ministers. It is hoped that we were able to convince them about giving us a partial exemption, especially as Iran is a major ally for us: we get 15%-20% of our oil from there and have a long-standing political and strategic relationship with Iran.

As for financial instruments, one that we have not yet used is the raising of deposits from non-resident Indians (NRIs). We got $69 billion in remittances from abroad in 2017[1], more than half[2] of which are from the Gulf; these were tapped before and there is no reason not to tap them again. It provides a cushion for our efforts to stabilise the rupee and provides investors handsome yields.

MK: On how the Indian government managed the rupee’s decline in the past.

SB: In 2013, the Indian economy was in worse shape, the rupee depreciated 28% and was over-valued. The government had raised NRI bonds then as well; it was – and is – an outlet for Gulf savings. Today, the US 10-year bond yields are under 3%; India’s yields today are 8.5%, higher than anywhere in the world. This time the fundamentals are better, so NRI deposits will get a high real rate of return with relatively little risk.

MK: On the apparent panic about the rupee’s depreciation.

SB: Politics enters at the time of the valuation of a currency. First, please note there is no official report from India that says the Indian currency was in need of depreciation; in fact, last year – and this year – the Reserve Bank of India (RBI) said in its official report on a comparison of currencies that the rupee’s fair value was lower than it should be, and it should strengthen.[3]

So when the media and others attribute the depreciation of the rupee to the country’s economic weakness, that is not supported, neither by the RBI nor the finance ministry. Yes, the rupee should be stronger than it is, but it is not.

Second, this is an election year and there are interest groups that will benefit if there is economic instability in the country. It happens when there is rapid depreciation of a currency, especially one not warranted by economic fundamentals.

In fact, the rupee’s fall is consistent with the dollar’s strength in 2018. In the last four years, the rupee has held strong, moving within a very narrow range of Rs 64-Rs.65 to the U.S. dollar.

MK: On other policy measures that can strengthen the rupee. And whether India can use global governance forums like the G20 and IMF board meetings to express concern over currency volatility and the impact on emerging markets.

SB: Yes, there is one more measure: taxes.

The G20 and IMF are not a solution.

The best way is to change our taxation to improve our competitiveness. Several economists and experts said the rupee needed to depreciate because our exports are flagging. It turns out that one of the larger reasons for exports not taking off is that the effective corporate tax rates in India are the second-highest in the world, after Japan. We need to use that tool to help the rupee. Our effective corporate tax rate – i.e. what is actually paid – is 25% in India. In comparison, most East Asian and even South Asian economies, including Bangladesh, pay taxes in the high teens. Our tax rate is 30% higher than theirs.

There is hope for the future in that there is a new direct tax report due from the government any time now on what it proposes on personal and corporate tax rates. I hope there is a recognition that the high tax rates must be brought down.

It is an especially acute concern, as the U.S. has decreased corporate tax rates to 20%; this puts pressure on all of us to reduce rates and become competitive.

MK: On that possibility in an election year.

SB: This change can be made in the budget, but this year it’s a Vote on Account. The government should recognise that in an election year, there are few solutions, but these are policy changes that can, and should, be made after the elections by the next government.

Surjit S. Bhalla is a member of Indian Prime Minister Narendra Modi’s Economic Advisory Council.

Manjeet Kripalani is Executive Director, Gateway House.

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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[1] The World Bank, Press Release – Record high remittances to low- and middle-income countries in 2017, 23 April 2018, <>

[2] Reserve Bank of India, Press Release – India’s Inward Remittances Survey 2016-17, 9 August 2018, <>

[3] In its Annual Report, 2018, the RBI noted, “The rise in the REER in the case of India is lower than for many peer economies.”

In its Annual Report, 2017, the RBI stated, “A sensitivity analysis using a ± 1 percentage point band around the sustainable-CAD to GDP ratio suggests that … despite minor blips, the INR real exchange rate remained closely aligned to its fair value over the long term.” (Note: Rupee/$ exchange rate as of June 2017 was 64).

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