Why perfect rupee-dollar parity could be the worst thing for India

The rupee seems to have lost its political appeal these days. The currency, which has been losing ground in the past week, now stands at 85 per a US dollar. From just four Indian rupees to a US dollar in 1947, the drop is a whopping 21 times.

Yet, nationalist champions who equated the strength of the rupee against the dollar as a show of the nation's strength seem to have lost interest in the currency. Other than in business news, politicians and TV debate talking heads seem to be not noting the near 3 per cent drop in the currency in 2024.

Going by their logic, an exchange rate of a rupee for a dollar would restore our national pride and all Indians could hold our heads high across the world.

If we magically achieve a perfect parity between rupee and dollar (i.e. 1 rupee equals 1 dollar) tomorrow, will it benefit Indians? On the face of it, that seems to be a fantastic idea: A $1,000 iPhone, available till yesterday for Rs 85,000, will cost Rs 1,000 - a discount of 98.82 per cent! In other words, overnight, anything and everything from around the globe, priced in dollars, becomes massively cheap for a buyer in the Indian rupee. What’s more, a million-dollar home in the US, previously affordable only to ultra-rich Indians at Rs 8.5 crore, will now be available at Rs 10 lakh.

While all global goods, services and assets become dirt cheap for Indians, overseas buyers will find the price of Indian goods, services and assets exorbitant. For example, an ordinary Indian T-shirt priced Rs 1,000, earlier available at $11.76, will now have a price tag of $1,000 – a jump of 85 times or 8,500 per cent! For Indian software exports, engineers' salaries will have to be in dollar terms, making them costly. The foreign investment into Indian shares or a manufacturing facility set up here would be as expensive as that in the US.

This barter rate (e.g., a Rs 1,000 T-shirt costing the same as a $1,000 iPhone) could be the worst thing that could happen to India. No Indian product, service, or asset will be bought either by Indians or by foreigners. Indians will find everything imported ultra cheap and everything produced in India exorbitant. Foreigners, too, will find everything except those made in India affordable.

Fortunately for us, there are insurmountable barriers to such a dystopian scenario. With rupee-dollar parity, there will be a massive, vertical drop in Indian GDP – the only economic activity in such a scenario would be services which cannot be imported, like a haircut or surgery. But how to pay for those services with no other economic activity and hence no other jobs and income? The only option left would be to migrate abroad. With no dollars from exports, foreign investment, and NRI remittances, the only dollar stock left will be the foreign exchange reserves with RBI, which are currently around $650 billion. With almost everything to be imported, this will be exhausted in two-and-a-half months as it is around a fifth of our GDP. The RBI, accepting a single rupee in exchange for a dollar? At a discount of 98.82%?

In an ideal world where goods, services, people and capital move freely around, there will only be one price for a specific good anywhere in the world. That is, the dollars you pay for coffee in San Francisco, when converted into Indian rupees, will fetch you exactly the same coffee as Mumbai – nothing more and nothing less. But we live in a turbulent world of Trump’s tariffs and Chinese dumping. Thus we have a world of multiple prices where international trade, investments and immigration face plentiful barriers and frictions.

A currency in such a world will be volatile, responding to domestic and global economies' inflation, interest rates, economic growth, and so on. It has both purchasing and selling power - just as one goes up, the other comes down. A ‘weaker’ rupee means its purchasing power goes down – if we had earlier got a dollar's worth of goods, services, and assets for, say, Rs 80, now we have to pay Rs 85. This also means its selling power goes up – if an overseas buyer previously got only Rs 80 worth of Indian goods, services and assets for a dollar, now he gets Rs 85 worth of those. So a ‘weaker’ rupee means Indian sellers get strong with higher sales while foreign sellers get weak with lower sales. Likewise, a ‘stronger’ rupee means foreign sellers get strong with higher sales while Indian sellers get weak with lower sales!

The takeaway is that the exchange rate movement has nothing to do with national honour. So the next time you get a WhatsApp forward extolling the virtues of 1 INR = 1 USD, don’t forward it.