Rupee is not ringgit

As the rupee hits an all-time low, there are some things sensible people can hang on to. India is not in South-East Asia. Never was, and if...

As the rupee hits an all-time low, there are some things sensible people can hang on to. India is not in South-East Asia. Never was, and if lessons are learned in good time, never will be in the same situation. It has been known since late last year at least that the rupee was overvalued and a correction was due. Left to itself and the gentle ministrations of the RBI, depreciation might have been gradual. But it was inevitable and only a question of when it would occur. In the event, currency turmoil in South-East Asia and the lemming-like march to the precipice of politicians in New Delhi have affected market psychology and set the timetable. The fall in the value of the rupee against the dollar has been 7 per cent since last August and may go down a further point before stabilising. This is steep for India. It is not as stomach-churning as the 30 to 50 per cent drops seen in that period in South-East Asia. It is possible the rupee could be pushed below the level dictated by economic factors as a result of speculative activity, as B. B. Ramaiah fears, or panicky reaction. But as long as the RBI goes on acting prudently and if sanity is restored soon in New Delhi, it would be a temporary phenomenon. The rupee ought to bounce back to its rational level soon enough.

There are good reasons for such optimism. Full convertibility has not arrived as yet, so the psychology-driven runs seen on the won, ringgit and rupiah cannot take place. In a still shallow foreign currency market the RBI can be an effective player. The current account deficit at 2.5 per cent is well under control. Inflation is low, interest rates are down. If partial liberalisation has had the effect of insulating the country from the troubles outside, good monetary management has played its part too. This is not to say the shock-waves of the South-East Asian crisis will not be felt here. The poorly performing export sector, its prospects partially improved by the devalued rupee, faces a combination of more aggressive export drives from South-East Asia as well as rising protectionist sentiment in Western countries. India is already feeling the effects of the turbulence in Asia with foreign investment showing a negative growth rate this month for the first time since 1991.

It is impossible to predict where the economies of South-East Asia and Japan are headed since so much depends on the responses of their governments, major trading partners and multilateral institutions like the IMF. Indian policy-makers have had a preview of the dark side of globalisation. However, autarky is not an option. Greater integration with the world economy is unavoidable for there is no other route to rapid economic growth. So lessons must be learned from the financial crisis in South-East Asia which in some cases originated in and in others was magnified by imprudent banking practices over many years. Banking and financial sector reforms begun in the last few years in India must be carried further. The sine qua non for a stable currency is a strong financial system and sound monitoring mechanism. Putting all that in place should be the priority.