Why the exchange rate is always subordinate to inflation
India stands apart historically from its emerging market peers regarding the exchange rate policy
According to news reports, recent remarks by the governor of Reserve Bank of India (RBI) Raghuram Rajan focused on the trade-off between inflation and external competitiveness with respect to the rupee’s exchange value. A depreciation or weak currency may not necessarily boost exports, he said, but would certainly have inflationary consequences by pushing up import prices. He additionally referred to the deliberate currency undervaluation policies pursued by some of India’s neighbour countries for long periods of time; this, he said, required repressing their financial systems.