The Hindu Business Line : The great contradiction

The rupee climbing above the Rs 40 a dollar level really does not mean much as far as currency fluctuation is concerned, especially if one has in mind the months it has been hovering at the Rs 40-plus level.

To go back a bit, the rupee was at the Rs 44 mark in March this year, climbing to Rs 41 and above by June. Since then, it has stayed in the Rs 40-Rs 41 range, being for the most part closer to the Rs 40 level.

So it was more a matter of time than anything else before the Rs 40-level was crossed, which is what has happened now, the trigger being the sharp cut in the US prime rate by 50 basis points earlier in the week.

It is being said that the current value of the rupee vis-À-vis the dollar is now at its highest level since end-March 1998, but this tends to give an erroneous view of the processes involved especially if the objective is to find out when last the rupee was as costly as it is now in terms of the US currency. Certainly, in nominal terms, the rupee was as costly as it is now at end-March 2007, but at that time the rupee was on its way down (it was at Rs 35.71 on August 19, 1997).

As everyone knows, the two situations are totally different. Thus, among other things, to quote a comtemporary report, “the post-Pokhran developments had led to the rupee touching a lifetime low of 42.70 against the dollar and the RBI had spent nearly $3 billion out of its forex reserves in restoring calm to the foreign exchange market. This had seen a massive dip in the forex reserves, which had dipped to around the $25 billion mark”.

Today, the reserves are more than $232 billion, and the RBI’s problem is not to sell dollars in an effort to prop up the rupee (as was the case in 1998 when the rupee was falling). The process is just the opposite.

Thus, in February this year, the RBI bought a record $11.9 billion from the open market, the corresponding figure in March slumping to $2.3 billion (resulting in a gradual strengthening of the domestic currency), taking the overall dollar-purchase figure to $22 billion since November 2006.

The controversy

According to reports, the RBI has altered its market-intervention policy as regards the rupee’s value vis-À-vis the dollar because of the increasing money supply in the domestic economy, leading in turn to an inexorably rising inflation rate.

There is a raging controversy over the sensibility of this policy, one bit of evidence cited by critics of the official stance being that China too is facing a huge inflow of the US currency (in fact, much larger than is India) and yet neither inflation (admittedly, the nature of the two economies are fundamentally different) nor the external value of the Chinese currency is posing any major problem.

Clearly, the mandarins at the RBI have selected a couple of parameters as being the most important in the framing of the market-intervention policy, which is currently resulting in the soaring rupee.

One view is that since elections are now around the corner (in any case, they are scheduled to be held in a couple of years at the latest), inflation must be kept on a tight leash — and hence the decision to clamp down on the increase in domestic money supply through the buying up of dollars in an effort to protect its value vis-À-vis the rupee.

Economy still attractive

But why this huge inflow of dollars, which has led the RBI to undertake the policy it has at the moment with all its myriad ramifications? The short answer would be that, apart from the remittances of NRIs, etc, foreign investors are finding the Indian economy attractive among the different markets at their disposal for them to put their money into.

This, therefore, essentially reflects the growing attractiveness of the Indian economy as an investment destination (portfolio, FDI, etc), which again is a matter of external perception based on rigorous analysis of the data available to the foreign investing community.

Surely, it would be foolish to try to control this flow as an answer to the problem of the rising rupee. It would also be suicidal because every patriotic citizen would like the Indian economy to grow in stature in the world at large.

In fact, whatever is happening in some of the other spheres which have a bearing on the position of India in the comity of nations strongly suggests that, in the eyes of the world, the country is progressing fast.

One very recent example of this development is the nuclear deal with Washington that is currently in the works, the one clear message being that, in the calculations of the US, it would be an error to exclude New Delhi from future strategic arrangements.

Thus, the one settled fact about India is that it is well on the way to acquiring its rightful place in the world, the potential of which has always been there ever since 1947.

The problem is that the entire process just delineated may be scuppered by growing political instability at home, which would affect external perceptions about, among other aspects, the domestic economy.

One does not have to think hard to say that this would be disastrous from the point of view of attaining the long-term target of improving the living standards of the average citizen, which, after all, should be the only goal of every responsible Indian leader.

Pushing for reforms

Mr Alan Greenspan, the former Chairman of the US Federal Reserve, is reported to have said that the Prime Minister, Dr Manmohan Singh, lacks the “authoritarian clout” to push ahead with his reforms.

In a recent book, he writes that Dr Singh “introduced much-needed reform but in many critical areas he was constrained by enduring socialist inclinations of his government coalition”.

To many people, such inclinations form the very basis of the Indian polity, which is the greatest source of its strength and sustainability.

And yet, it is also a contradiction confronting the country’s future organic growth, one that needs to be worked out dialectically for a new synthesis to emerge as a springboard for the India of our children and grandchildren.

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