×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

A million-dollar rupee question

A million-dollar rupee question
Comment E-mail Print Share
First Published: Sun, Oct 03 2010. 10 00 PM IST
Updated: Sun, Oct 03 2010. 10 00 PM IST
It may be our currency, but it’s your problem.” The same fait accompli the US delivered to Europe, after devaluing the dollar in 1971, comes again. Some countries get to toy with their currencies, but the problem lands on the head of emerging markets such as India.
Brazil, another emerging market, isn’t pleased accepting this fact: Last Monday, it warned of an international currency war. On cue, the US on Wednesday passed legislation against China’s currency policy.
As central banks intervene, exchange rates are becoming the lodestone for post-crisis controversy. The developed world either explicitly favours a devalued currency to boost exports (Japan) or doesn’t mind an incidental devaluation (the US). The developing world either directly wants a weak currency to help trade (China) or reacts to currency appreciation that affects trade (Indonesia).
Taken to the extreme, such intervention—a week last month saw 25 different central banks at it—has the makings of a 1930s-style devaluation war. More likely now is a 1980s-style currency agreement. Just as the US coordinated one then to help keep the dollar down, developed countries today could engineer a joint depreciation.
That spells trouble for developing countries. Not only will their currencies appreciate automatically against the developed ones, hurting trade, but capital will boom even more. Brazil seems to be contemplating intervention. Should India?
Considering the rupee last week hit a five-month high and foreign flows smashed records, this isn’t an academic question. Stock valuations and current account deficits are high enough to call to mind the dangerous days of overheating in 2007, though other monetary indicators are relatively muted.
The Reserve Bank of India (RBI) will have to decide whether it should repeat what it did then: Sell rupees to stem its rise, and perhaps mop up those rupees into special bonds. A concerted strategy is a must here, mostly because one action will complicate another: Selling rupees could fan inflation.
India has to choose: It can’t get a desired exchange rate and keep inviting capital inflows without letting inflation get out of hand. We would think that it’s easiest to compromise on capital inflows; the government, judging by how it relaxed controls last month, doesn’t. It’s unfortunate that it’s our problem, but we have to deal with it.
Should RBI intervene in currency markets? Tell us at views@livemint.com
Comment E-mail Print Share
First Published: Sun, Oct 03 2010. 10 00 PM IST
More Topics: Ourviews | Dollar | Rupee | Currency | Exchange Rates |