Exchange rate issue

Open economies with relative freedom for global capital flows cannot set an exchange rate by committee


Photo: Mint
Photo: Mint

There was a time when the value of the rupee was decided in New Delhi. The famous 1966 devaluation was a political decision by the Indira Gandhi government. The subsequent debate was also political. It was much the same in 1991.

India no longer has a fixed exchange rate. The international value of the rupee is determined in the foreign exchange market. The Reserve Bank of India intervenes whenever there are episodes of volatility. One persistent—and in our view justified—criticism is that the rupee is overvalued to an extent that Indian exports become uncompetitive.

The Narendra Modi government is now reportedly considering setting up a committee to determine what the fair value of the Indian currency should be. This is a ridiculous idea. Open economies with relative freedom for global capital flows cannot set an exchange rate by committee. Even those who have never heard of the impossible trinity should realize that the world has changed. We are not living in 1991. And definitely not in 1966.

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