Last week, a television channel reported that the Commerce Ministry might propose devaluation of the Indian Rupee to increase export competitiveness. The report sent shock waves through the markets. In no time, investors pull out funds and the currency fell over a two-week low, and it triggered the RBI to call forex dealers to check on their positions. Later in the day, the "news" was identified as false, with the ministry steeping in with a clarification for damage control, and the rupee escaped further catastrophe. The whole episode is unfortunate.

Is devaluing the rupee a good idea? In India, unlike in China, the government does not control the exchange rate of the currency, and the RBI intervenes only when there is high volatility. So, the question of devaluing the rupee does not make any sense. Also, even if rupee devaluation seems to be good for exports on the surface, we cannot ignore the fact that our exports use a lot of imported content. In addition, our imports bill will rise as we are heavily dependent on imports of oil and defence equipment. Inflation may jump as well. Companies exposed to high foreign debt will suffer. Most importantly, such a step will certainly give a wrong signal to foreign investors.

The commerce minister, while denying the rupee devaluation report, said that the government is currently focusing on helping investment in domestic industries, increasing the share of MSMEs in exports and taking advantage of opportunities arising from stimulus programmes introduced by major economies. She also emphasized on looking at niche segments and expanding to new markets. While these proposals sound good, I think focus should first be on those issue which are long overdue, such as high cost of credit, high transaction cost, inefficient transport infrastructure and lack of innovation, etc.     

Meanwhile, latest official data shows that exports fell marginally by 0.3 percent to $21.15 billion and imports 14 percent to $29.19 billion, resulting in a sharp 38 percent decline in trade deficit to $7.67 billion in August. It seems the export sector is moving towards better days slowly but steadily. It is also encouraging that shipments from a number of labour-intensive sectors -- including handicrafts, gems & jewellery and garments -- rose in the month. However, service exports, as shown by last week RBI data, fell by 4.6 percent to $12.78 billion in July.  

I invite your opinions.