Rates of Exchange and Exports


It is generally believed that when a currency is upvalued(revalued) it would affect exports as the export items would become costlier. This is not really true. When the currency is revalued, imports become cheaper and cost of living comes down. The local currency gets strengthened. In 2005, Chinese Yuan RENMINBI(CNY) was USD 1 = CNY 8.09. Since then the CNY has appreciated and now USD 1 = CNY 6.09. With the appreciation of CNY exports did not decrease. On the contrary, exports from China when up from USD 939 billion in 2006 to USD 2,057 billion in 2012. Indian exports also went up from USD 122 billion in 2006 to USD 298 billion in 2012. The Indian Rupee also depreciated from USD 1 = Rs. 45 to USD 1 = Rs. 60. Here the depreciation is not the main reason for the increase in exports. Even without the deprecation the exports went up to USD 198 billion in 2008. So while fixing the rate of exchange the purchasing power of the respective currencies should be taken into account. The main contributing factor for increase in exports is surplus production, lower cost of production and the quality of products. A currency should not be allowed to depreciate thinking that this would contribute to increase in exports. The rate of exchange between Indian Rupee and US Dollar should be USD 1 = Rs. 20 or Rs. 25.  


Author: Singharan Govindan

Rate of exchange between dollar and rupee


The Finance Minister is reported to have said that the correct rate of exchange between US$ and Indian Rupee is US$1= Rs.59 or Rs.60. This does not appear to be correct.

The wages for an hour of an unskilled worker on an average is about US$ 8/- in United States.In India it is about Rs.50/’ In this case US$ 8= Rs.50 or 1 dollar is equal to about Rs. 6.25. A cup of coffee in Food Courts on average costs about US$1.00/- In similar establishments in India, it is about Rs.30/- In this case 1 US dollar is equal to Rs.30/- Average price of 1 litre of milk in US is about 1 dollar. In India, it is about Rs.30. In this case also 1 dollar is equal to only Rs.30/- Of course in manuufactured goods, 1 dollar may be equal to Rs.40 or more. Taking all the products and services (GDP) in India, IMF/World Bsnk etc.estimated in 2012,India’s GDP to be around 5 trillion dollar by Purchasing Power Parity method and nearly 2 trillion dollars by rate of exchange method The rate of exchange in 2012 wad about Rs.50 per dollar. This shows that the real parity between dollar and rupee in 2012 should have been only Rs.20/dollar. in 2013 it could be about Rs.30/-.

Currency War-US, Europe are unjust in their demand for Yuan appreciation


The rate of exchange between US$ and Chinese Yuan is around $1= Yuan 6.7. US(and other developed countries in Europe etc) thinks that Yuan is undervalued to the extent of about 25% i.e. their view is that the rate should be around $1= Yuan 5 or 5.5. The arguments of US is that since the Yuan is undervalued, products imported from China into US are cheap compared to local products, and this is detrimental to the US industry, and leads to job cuts estimated at around 0.5 million. Further, US products exported to China are expensive in China and hence US exports suffer. China’s foreign exchange reserves are very large (around $2650 billion) and this should normally make China’s local currency appreciate against other currencies but it is not happening. . According to US, China manipulates the exchange rate

US argument is not fully justified because,

i).it does not take into account, the fact the China exports to around 200 countries and the number of countries affected by current rate of exchange are only a few. Most of the developing countries benefit when prices of imported products are low.

ii) Many countries do not have the concerned industry and the question of the local industry suffering or workers losing jobs do not arise at all.

iii) Where local industry exists, Chinese equipments and products fill the gap between supply and demand, at comparatively low prices thus meeting requirements of importing country and helping industrialization of that country.

iv) Even in US, the general public will only be happy to get their requirements from China at a lower rate. The large number of consumers is not bothered about the job loss for a few hundred thousand people or manufacturers suffering loss.

v)To protect the local industry and save the jobs, US could think of means like imposing/increasing import duties on Chinese products, assisting the exporters with incentives like low interest rate for exporters, exemption from tax for profits from exports etc.

vi) US could think of means of making its industry competitive in relations to Chinese industry, by asking workers to increase their productivity, upgrading technology, minimizing overhead expenses etc..

vi) US(also European) industry being affected by Chinese exports or its inability to export to China is a bilateral issue and should not be made a multilateral issue as the US gain from appreciation of Yuan will harm many, particularly developing countries importing from China.

Revaluing Indian Rupee against Foreign currencies


A few decades ago, Sri Lanka brought down the prices of several items by revaluing the Sri Lankan Rupee i.e. by changing the rate of exchange between Sri Lankan Rupee and foreign currencies, making foreign currencies cheaper. This meant that costs of all imported items came down immediately. Then the prices of domestic products which have foreign components by way of equipment, raw materials and fuels also came down.

India imports most of its requirements of petroleum and petroleum products. By changing the rate of exchange between the Rupee and US$ dollar, to say $1 = Rs.20, instead of Rs.45 now, costs of petrol, diesel oil, fuels etc. would come down by about 50%. Costs of imported coal would also come down. Costs of electricity production would fall. Costs of transport would fall heavily. With cost reductions transport, electricity and fuel oil, prices of all manufactured items will also fall. There would be all round decrease prices.

Similarly, India also imports rough diamonds and raw cashew nuts which are then processed. With a revaluation of the Rupee, there would not be a need to subsidize exporters of these and other processed goods.

With such an action, exports will be affected. Though the exporters will continue to get the same price in terms of dollars, and their cost of production would have come down, their realization in terms of Rupees will come down.  They can be compensated by way of suitable cash allowance as had been the case in 1970s.  Instead of the importers subsidizing the exporters, the government would be subsiding the exporters but to a lesser extent. Tourism industry may not be affected much as the tourists could be made to spend more in terms of foreign currency.