Tags:
Journalism of Courage
It makes economic sense not to press the panic button,or give in to exhortations to shore up the rupee
The rupee has fallen further,prompting many to think it is time to press the panic button and do something. But before that is done,there are questions to ask: why is the rupee falling? What can we do about it? Should we do anything about it? The only answer is that,other than policies that support good growth and low inflation,or,as economists like to call them,strong fundamentals,there is very little that can or should be done about the rupee.
Can India do anything about these global flows of capital and keep the rupee strong in the middle of these large flows? It would be foolish to try. The RBI has very sensibly stayed away as it cannot do anything. As a former RBI deputy governor once remarked,the RBI cannot manipulate the rupee. It does not have the ammunition to do so. In any case,when exports are growing at historical lows,a better option would be to think of it as a blessing. Exports will become more competitive with a weaker rupee,an argument made for years by those who wanted India to follow the export-led China growth model. The argument used to be that the RBI should buy dollars in the foreign exchange market and push the rupee down. Now this is happening by itself. Other emerging economies with floating exchange rates often Indias competitors are also depreciating. Why would we want the rupee to remain strong?
