Opinion
| Previous
| Next
Articulating the exchange rate
THE EXCHANGE RATE policy has come under sharp focus for two
interrelated reasons. The strong measures announced by the RBI to
stem the exchange market volatility on May 25 was in sharp
contrast to its earlier stance of benign non-interference just
two weeks ago. On May 10, when after a long period of stability,
the rupee lost 35 paise against the dollar breaching in the
process the psychological threshold of Rs. 44, the central bank
did not intervene overtly. Since over the next fortnight there
was a comparative calm in the markets, there was a presumption
that the rupee's sudden fall was in fact blessed by the RBI,
which has strong, if unstated, reasons to favour a gradual
depreciation of the rupee. However, a recurrence of volatility
has forced the RBI Governor not only to clamp down but even more
significantly articulate the official stance towards exchange
rate management.
The articulation was perhaps overdue. The exchange rate
management is one of the least understood of the economic
policies. Even those who have a direct stake in the day-to-day
exchange rate movements - importers, exporters, bankers and so on
- probably do not know very much more than what has been revealed
to them: that the rupee which is convertible only on the current
account has its day-to-day exchange rates determined by the
market forces of demand and supply. As stated in its recent
monetary and credit policy statement, the primary objective of
the RBI continues to be the maintenance of orderly conditions in
the market, meeting temporary imbalances either from the supply
or demand side. Over destabilising and self-fulfilling
speculative forces, the RBI has been particularly severe in the
recent past. Its rupee defense packages have been radical to the
extent of even departing from committed reform measures. For
instance in August 1998, when along with other measures it hiked
the CRR to pump out speculation-aiding liquidity, the RBI was
reversing, albeit temporarily, the progress towards a dismantling
of the statutory pre-emptions.
In fact flexibility has been the cornerstone of RBI's exchange
rate policy and this seems to extend to the near term external
value of the rupee as well. The RBI has claimed that it neither
targets a particular dollar-rupee value nor pays heed to outside
pronouncements regarding the recent low levels of the rupee
against the dollar. Evidently, exchange rate management involves
taking a view against other principal currencies as well and the
Governor is right in cautioning against the currently fashionable
narrow focus on the dollar value of the rupee alone. The latter
has had two negative consequences: the recent gains scored by the
rupee in relation to other major currencies such as the euro and
the pound sterling are ignored. The current dollar-centric
approach not only falls short of comprehending the big picture
but sets off panic reactions whenever the rupee loses by a few
paise or infinitesimally small percentage points against the
dollar. However, since much of the global trade and almost all of
interbank dealings are dollar denominated, it is difficult to see
how the American currency will lose its visibility.
Of the measures announced on Thursday last, the two which appear
drastic - the imposition of a 50 per cent surcharge on import
finance and a penal rate on overdue export bills - are expected
to be withdrawn soon. The RBI has cushioned their impact by
segregating government debt repayments and petroleum imports from
the levy. Their effect lies more in altering the sentiment
against the rupee by curbing the demand and increasing the
supply. Last week's intervention is once again marked by
flexibility buttressed by a strong articulation of the RBI's
approach.
Send this article to Friends by
E-Mail
|
|
