Attributing the fall in the Indian rupee solely to the US dollar strengthening, former Reserve Bank governor Raghuram Rajan has said that any intervention by the RBI could harm Indian exports, even as he urged policymakers to focus on creating more jobs and boosting household consumption.
Asked about the implications of a second term for US President Donald Trump on the global and Indian economy, Rajan said, "I think it means uncertainty. President Trump, during his campaign, laid out a bunch of policies and measures that he wants to implement."
"We are seeing some of them being implemented. We have to see how intensely, for example, the policy on immigration, trade, and tariff proposals are enacted, and against whom and which sectors they are targeted. As of now, we don’t know how all this will pan out," the eminent economist said.
On the appreciation of the US dollar and its impact on other currencies, especially in emerging markets like the rupee, Rajan said the dollar has been appreciating partly due to fears of Trump’s tariffs.
"If he imposes tariffs, it will decrease US imports from other countries, narrowing the current account and trade deficits. So, from that perspective, it means the US needs to import less, and the dollar will strengthen because there will be fewer dollars in the rest of the world. That’s the straightforward reason," the former IMF chief economist explained.
"There is also a view that the US is becoming more attractive as an investment destination because those who can’t export to the US will move their production there. Additionally, more capital is flowing into the US, leading to a stock market boom and further strengthening the dollar," he said.
All these factors, along with the US economy growing very strongly, are contributing to a stronger dollar, he added.
Asked if there is anything the Reserve Bank of India can do to curb the depreciating rupee, Rajan said, "I’m not sure whether the RBI should do anything, because every other currency is depreciating against the US dollar. If it tries to elevate the rupee vis-à-vis the dollar, it will essentially strengthen the rupee against all other currencies, making it more difficult for our exporters."
"So, I would be careful about that. I would only intervene if the depreciation of the rupee is really abrupt and creates a lot of volatility. That has always been the RBI's motive for any intervention – to reduce volatility, not to try and change the eventual level of the rupee," he added.
"I think the Reserve Bank has not acted in a hurry, nor has it intervened with the aim of preserving the value of the rupee at any particular level. It has always allowed the market to find its own level," he said.
Asked whether the US becoming a more attractive investment destination is happening at the cost of other countries and could impact India as an investment destination, Rajan said, "The idea behind tariffs is to reshore production, so it will affect foreign direct investments in other countries." Instead of investing in other countries, people will invest in the US, he said.
"For example, we are seeing Taiwan investing more in the US to produce semiconductors there. That’s not so much because of the tariff policy, but because of the incentives provided. However, we may also see the tariff policy producing incentives for factories to produce directly in the US," he explained.
On expectations from the Union Budget in India, Rajan said, "We do need to worry about the recent slowdown in economic growth." "Of course, one quarter does not tell the whole story, but it has come after we were growing very slowly before the pandemic, then during the pandemic, there was a brief downturn, and we recovered," he said.
"The concern is that much of the strong growth in recent years was recovery growth, and now we have to build sustainable growth. Sustainable growth will come from significant investments and consumption growth," Rajan said.
"We have concerns on those two fronts. Private investments have not picked up. When we look at demand, earlier it was the middle class and lower middle class that were weak on demand, for example, in the two-wheeler market, but now it is the upper middle class where demand is softening," he said.
Household demand for consumption arises when households feel secure, and their jobs and incomes are growing, Rajan said.
"Recently, we have seen concerns about people’s jobs and the kind of income they have. For these reasons, I would suggest that the focus in the budget should be on how we create more jobs, better jobs, and more confident households," he said.
"More households consuming more will result in private industries investing more. It is a virtuous circle, and we need to figure out how to fix this," he concluded.
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