Daffodil International University
Faculties and Departments => Business Administration => Business & Entrepreneurship => BBA Discussion Forum => Topic started by: Rozina Akter on September 10, 2013, 12:35:16 PM
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Recently the currencies of some emerging economies have been in the global news and not for once. Usually it is the currencies of developed economies that make the rounds on daily basis in the news network because of their importance. After posting stronger and steadier growth compared to developed countries the emerging economies under the rubric of BRICS (Brazil, Russia, India, China and South Africa) came to be treated with deference. They joined the major league of global players in the world economy. Their currencies remained stable and strong, underpinning the robust economies. Not any longer, though. Barring Russia and China, the remaining three are now facing trouble, mirrored in the decline of the currencies. Other emerging economies like Indonesia and Turkey, not members of the elite club, have joined them sharing the same predicament of currency appreciation.
The fall in the value of the currencies of these countries has been traced to the announcement by the Federal Reserve Bank of America (Fed) about imminent 'tapering off' of the ultra-easy monetary policy known as 'quantitative easing' (QE). Having flooded the market with money through purchase of treasure certificates and bonds the Fed is poised now to phase out the loose monetary regime. This announcement has sent alarm bell ringing among investors who flush with hot money are now looking for profit in domestic financial markets buoyed up by rise in interest rates and higher price-earnings ratio of shares. As they scramble to reverse the investment taking their money home in America and Europe, countries with emerging economies like India have been left out on a limb. Since May 26 when the Fed announced the 'tapering off' of QE, Indian Rupee has fallen by 20 per cent in value to Dollar while the decline in values of Indonesian Rupiah and Turkish Lira has been 10 and 8.0 per cent respectively.
Bangladesh is not affected directly by the announcement about QU as no hot money was channelled through portfolio investment in our stock market. Bangladesh currency, ironically protected from external shocks because of lack of attraction to foreign investors with hot money, has maintained a steady exchange rate of Tk. 77.72 to US dollar since June this year. It appreciated at the modest rate of 1.28 per cent since January this fiscal and is seen as a normal market correction giving no cause for concern.
ANXITIES AMONG EXPORTERS: But the fall of Indian rupee by 20 per cent in recent months has given rise to anxiety among exporters of some items in which India is a competitor. There has been a knee-jerk reaction among the exporters of these items leading them to think in favour of depreciation of Taka to match the fall of value of Indian Rupee. For a number of reasons their anxiety is exaggerated and misplaced as would be discussed below.
It is true that Bangladesh being the major trading partner of India developments in the latter's currency hold the potential of affecting Bangladesh through trade. But here a distinction has to be made between a sudden change from status quo that is short lived to one that is for the medium to long terms. It is apparent that what is happening to Indian Rupee in terms of its value compared to Dollar is a market correction of the unusual incidence of sudden inflow of hot money from America and Europe. As the international financial markets have started reverting back to normalcy through change in the profitability of funds in terms of higher returns the hot money from the developed economies that poured into markets like India has started a reverse flight back. The financial market has a built-in mechanism to correct abnormal behaviour of capital whenever the equilibrium is upset by internal and external factors. If not through the deliberate policy of 'tapering off' of QE by Fed it would have come in other ways and forms, perhaps less dramatically and visibly.
RBI INTERVENTION: What is of importance for the value of Indian Rupee is that its sudden depreciation is going to be as short lived as has been its appreciation after the flow of hot money. It would have been a different matter if, instead of market, the government were to make the decision to depreciate the Rupee. As a deliberate policy of the government depreciation would be for the long haul with its inter-connected effects on inflation, current account balance, budget deficit and private and public debt. Since the Indian government is worried over the decline in the value of Rupee and has taken various steps like raising short-term interest rate and is contemplating to sell Dollars in the open market, depreciation of Rupee at the present level should not be seen as for the long term. After market correction and through the intervention of the Reserve Bank of India (RBI) the Rupee to Dollar exchange rate will improve, if not recouping the lost ground, to settle at a moderate level of rise, perhaps half of the present fall in value, that is 10 per cent. A decline in the value of Rupee to the degree of 10 per cent for the medium term is not as alarming (for India) as the fall by 20 per cent or more.
NOT A MATTER OF CONCERN: The eventual fall in the value of Indian Rupee is not going to be unfavourable to Bangladesh economy. But it is contended that even the present decline in the value of Indian Rupee is not a matter of concern for Bangladesh.
Of Bangladesh's total imports the bulk comes from India and the quantity and value are both increasing every year. The export of Bangladesh to India being far less than imports there is a chronic deficit in the current account balance and it is burgeoning. Depreciation of Indian Rupee to Dollar in the backdrop of a more or less stable rate of exchange between Taka and Dollar will mean lower payment for the same quantity of imports. Even if for the short term this gain will help Bangladesh to narrow gap between import and export with India. As regards exports to India, decline in the value of Rupee will fetch lower export earnings for the same quantity. But as the volume of export is low compared to imports to India the balance in earnings will be positive for Bangladesh after making adjustments. So, in the short run Bangladesh stands to gain in terms of its current account with India because of the appreciation of Rupee.
Our exporters, particularly for garments and textiles, have expressed their concern at the fall of Indian Rupee as they apprehend foreign buyers will shift to Indian suppliers attracted by lower price caused by depreciation. This could be the case if the foreign buyers were certain that the depreciation of Rupee will continue for the medium term. Since there is nothing to assure them of this, rather the indications are to the contrary, it is not likely that they will make a beeline for the Indian garment exporters. Our garment producer have to worry not about decline of exports due to Rupee's decline in value but their own failure to improve working conditions and wages in the garment sector. Even at 68 to Dollar, the lowest exchange rate reached ten days back, Indian Rupee will not be in a position to undermine our standing in exports of garments because of the margin of difference in the exchange rates between Rupee and Dollar and that between Taka and Dollar.
The Taka to Dollar exchange rate has held ground since June last with appreciation of only 1.28 per cent since January this year. With inflation under control at 7.5 per cent, increasing volume of remittance and rise in export earnings since the beginning of the current fiscal, maintaining a stable exchange rate looks very much plausible. Due to favourable external conditions and a pragmatic management of money most of the macro-economic fundamentals are now in a robust state. In view of this and for the reasons explained above Bangladesh can face the challenge of a declining Indian Rupee in the short and medium terms quite comfortably. As J.M. Keynes famously said 'in the long term, we are all dead', looking beyond the medium term will be futile.