The dollar devaluation and India's balance of payments

Abstract

This paper examines some of the consequences of the devaluation of the US dollar of February and the decision of the Government of India on the exchange rate of the rupee on the major items of India's Balance of Payments. The problems and opportunities emerging from the present devaluation of the dollar are analysed. It is concluded that the new rupee rate, implying 3.7 per cent revaluation against the US dollar, is likely to affect Indian exports to the US only marginally. The effective depreciation of the rupee vis-a-vis major European currencies (excluding the pound sterling with which the rupee is linked at the present for defining the central rate of the rupee) and Japan is likely to lead to increase in our exports to these countries. On the other hand, the total costs of our imports are likely to increase due to the substantial revaluations of these very currencies. Our trade balance may, therefore, actually show unfavourable change in the short run. This leads to the need for vigorous measures at promoting our exports. In view of the fact that many developing countries who are our competitors in the US market are likely to go along with the devaluation of the dollar by the same amount, we cannot afford to revalue the rupee substantially against the dollar. We should wait and see the experience of the floating pound sterling and the performance of the dollar in the near future and also know more about the exchange rate decisions of our major competitors in trade before fixing the new parity of the rupee in terms of gold to serve our national interest in the best possible manner.