The rupee's lurch and larger concerns

WITH THE RUPEE lurching below the Rs. 47 mark against the dollar after a long period of relative stability, there has been a revival of interest in the currency market. Hitherto, the stock market was hogging all the attention, what with the spectacular post-budget volatility and the alleged shenanigans almost causing a systemic collapse. At least in the matter of sentiment the forex market was bound to be affected. The meltdown of the once highly fancied technology stocks and more generally the low morale in the capital market would normally have caused a flight of the all important foreign portfolio funds. Fortunately, that has not happened so far. Even during the current month capital inflows have been positive. In the first three months of the year foreign institutional investors have remitted more money into India than they did during the whole of last year. The country's forex reserves touched an all time high of $42.69 billions last week.

The management of the external sector has been a bright spot in the conduct of the monetary policy. The rupee which is on a managed float has remained relatively stable even while the East and South East Asian currencies collapsed during the end of the last decade, taking down their economies. Since then, however, the process of integration of India into the global economy has inexorably been gathering momentum. Although the rupee is not yet convertible on the capital account - a significant blessing these days - it will be far more difficult to insulate the Indian economy from a possible contagion originating abroad. The latter rather than just the fall of the rupee to below Rs. 47 is what should cause immediate concern. It is essential therefore to find out whether there are any special factors behind the rupee's latest weakening.

The Finance Minister, among others, has said that the rupee's recent fall is in line with the general depreciation of some major Asian currencies in relation to the American dollar. Over the past few days the major global currencies, the euro, the yen and the sterling, have also lost against the dollar, some to a larger extent than the rupee. Even so it will be unwise to be complacent. Experts say that the global financial markets have become inscrutable to the point where a correct diagnosis of the common problems and therefore possible solutions to them have become nearly impossible. The great debate is over the course of the American economy and the consequent impact on the dollar, which continues to be the world's reference currency. A recent RBI study shows that for India's trade too the dollar will reign supreme no matter what changes emerge in the direction of trade. Throughout the 1990s, the dollar has been the dominant currency for trade purposes and will remain so in the foreseeable future.

Hence, in a real way the happenings in America, the success in effecting a soft landing of an overheated economy or preventing its slippage into a deep recession, concern policy-makers everywhere. It is certain that the credit policy to be announced by the RBI on Thursday will address this key issue. Quite ominously, the early manifestation of the global linkages has been in the stock markets where the Nasdaq's volatility has been imported into India. Given that the linkages among the domestic financial markets in India is stronger than ever before, there is a strong case to guard against a volatile rupee-dollar rate. Stability in the external economy has become a key goal of the RBI along with price stability and provision of credit to the real economy. Notwithstanding the unhappy developments in the country's stock market and the concerns emanating from the U.S., there is no need to waver from those desirable goals.

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Section  : Opinion
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