An interest rate dilemma

An interest rate dilemma
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First Published: Fri, Feb 27 2009. 12 14 AM IST
Updated: Fri, Feb 27 2009. 12 14 AM IST
Any currency has two values—a domestic value that tells us how many goods and services a unit can buy in the local market, and an external value, which tells us how much dollars a unit can buy.
Thursday brought two divergent trends in the value of the rupee. The drop in wholesale price inflation suggests that the pace at which the Indian currency is losing purchasing power at home is now under control.
But the rupee closed at a record low of 50.48 to a dollar, an indication that it can buy fewer foreign currencies than before. A wide current account deficit and weak capital inflows are likely to push the rupee to newer lows through the rest of 2009.
Now this can create a policy dilemma. The standard textbook response to a weak currency is to raise interest rates to attract foreign capital. But low inflation and a slowing economy demand lower interest rates.
The Reserve Bank of India will have to choose: Should it focus on the weak rupee or on weak growth? We would prefer the latter, for now.
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First Published: Fri, Feb 27 2009. 12 14 AM IST
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