Interviews
Stronger rupee Vs weaker exports
21 Jun '07
9 min read
While commenting on the present Foreign Exchange situation Mr.Tarapore, has recently stated that "the Reserve Bank of India faces an unprecedented monetary policy quagmire which makes monetary policy formulation extremely difficult. India is still the flavour of the hour and there have been relentless capital inflows into the country."
"This could, however, change overnight. Now suppose the RBI does not intervene in the forex market, there would be an unbridled monetary expansion and at the same time there would be an appreciation of the Real Effective Exchange Rate (REER) i.e. the trade weighted nominal exchange rate adjusted for inflation rate differentials."
"A real appreciation of the rupee is clearly against fundamentals and is clearly unsustainable as it would imply an over-valuation of the exchange rate. Continuing with an over-valued exchange rate, along with excessive monetary expansion, is a sure invitation for a crisis. Foreign investors faced with an unsustainable appreciation of the rupee, excessive monetary expansion and consequential inflation would be well advised to encash on the stock exchange boom and exodus out of India."
"To put it bluntly, a prolonged and large REER appreciation would be suicidal for India as fundamentals will eventually require a sharp exchange rate depreciation. Indian industry, caught in the large oscillations of the exchange rate, will be badly hurt. The large capital inflows and large monetary expansion will exert a downward pressure on interest rates even though the inflation rate would be high. A REER appreciation is a totally inappropriate instrument to control inflation". If we persist with such patently wrong policies, real GDP growth will go into a tailspin and there will be a resurgence of inflation.
"This could, however, change overnight. Now suppose the RBI does not intervene in the forex market, there would be an unbridled monetary expansion and at the same time there would be an appreciation of the Real Effective Exchange Rate (REER) i.e. the trade weighted nominal exchange rate adjusted for inflation rate differentials."
"A real appreciation of the rupee is clearly against fundamentals and is clearly unsustainable as it would imply an over-valuation of the exchange rate. Continuing with an over-valued exchange rate, along with excessive monetary expansion, is a sure invitation for a crisis. Foreign investors faced with an unsustainable appreciation of the rupee, excessive monetary expansion and consequential inflation would be well advised to encash on the stock exchange boom and exodus out of India."
"To put it bluntly, a prolonged and large REER appreciation would be suicidal for India as fundamentals will eventually require a sharp exchange rate depreciation. Indian industry, caught in the large oscillations of the exchange rate, will be badly hurt. The large capital inflows and large monetary expansion will exert a downward pressure on interest rates even though the inflation rate would be high. A REER appreciation is a totally inappropriate instrument to control inflation". If we persist with such patently wrong policies, real GDP growth will go into a tailspin and there will be a resurgence of inflation.
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