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Either-or problem

Photo: RupeePremium
Photo: Rupee

A weaker currency could lend Indian products and services a price edge in export markets. But RBI’s mandate is to keep retail prices in control. And, given the rupee’s convertibility, the two objectives could be at odds.

Economist Arvind Panagariya reportedly believes that the Reserve Bank of India (RBI) must not fret over domestic inflation and should instead keep the rupee from going up too much. This is in line with the Jagdish Bhagwati school of thought, which prescribes trade-led growth. A weaker currency could lend Indian products and services a price edge in export markets. But RBI’s mandate is to keep retail prices in control. And, given the rupee’s convertibility, the two objectives could be at odds.

With recent bursts of dollar inflows putting upward pressure on the rupee, RBI appears to have eased off on its buying of greenbacks to contain our currency’s rise. Going easy on foreign exchange aims, it may hope, will help it keep imported inflation in check. It would no longer need to worry too much about inflationary injections of liquidity into the economy imparted by dollar purchases. Such spurts can be neutralized by selling bonds and sucking out cash, but that could work against its interest rate policy. So, a strong rupee bias it is. But what if the US tries to inflate its economy? That would worsen our dilemma. Capital controls, though, may be even worse

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