Sajjid Chinoy: No free lunch when hit by global shock; defending Rupee has its tradeoffs

The rise in imported inflation is a result of the sharp depreciation of the rupee, but the trade-off involved in defending the value of the currency has a negative impact on exports, labour-intensive sectors, jobs and economic growth, Sajid Chinoy, chief economist for India at JPMorgan who is also a part-time member of The Prime Minister’s Economic Advisory Council (EAC-PM) said at an explanation session organized by The Indian Express on Tuesday.

Chinoy added that with each depreciation of the rupee in dollars, inflation rises by 8-10 basis points, and although the impact of exchange rate movement on inflation is higher than expected, it is not completely driving the inflation rate.

“…there are trade-offs here. Suppose the rupee did not move at all and the Reserve Bank of India used all its reserves and kept the rupee at 75 (against the dollar) and this 7 per cent drop did not occur, which means 4-5 per cent of the real exchange rate appreciation.We’ve seen over time that this doesn’t happen immediately, hurting exports.In the 2018 paper we wrote, we found that it affects textiles, leather, gemstones, jewelry, engineering goods and medicine.There is higher inflation but the trade-off is that if you don’t have it, So what you get is: Exports get hit, growth gets hit, and that’s going to be the labour-intensive sectors and that means jobs will eventually get hurt. So the pain has to be felt somewhere. The question is do you feel pain all over the population or do you have concentrated pain where you leave Some sectors and some workers already have their jobs.There is no free lunch when you are hit by a global shock.

Speaking at the explainer session moderated by The Indian Express Executive Editor P Vaidyanathan Iyer on Tuesday, Chinoy said of the 7 percent inflation rate in the country, roughly 50-70 basis points was attributable to the weak exchange rate as well as a massive transplant of Commodity price hike. “I understand the argument that when the rupee weakens, you get higher inflation but the amounts matter. The Reserve Bank of India estimates that for every drop in the rupee rate against the dollar, inflation rises by about 8-10 basis points. Since the beginning of the year, we have fallen by about 7 per cent. cent. This tells us that out of the 7 percent inflation rate in India, 50-70 basis points is attributable to the weaker exchange rate. These exchange rates may be greater than we thought, but they do not drive half the movement of inflation in India, they are actually Come from the rebound of goods.

The depreciation of the rupee against the dollar, due to strong monetary tightening by the US Federal Reserve and spillover effects of the Russian-Ukrainian conflict, has posed significant challenges for policy makers in the government and the Reserve Bank of India. The rupee depreciated more than 7 per cent in 2022 and broke 80, before embarking on a partial recovery, largely due to central bank intervention in the forex market.

Leave a Comment