The Hindu Business Line : Rupee appreciation

Both the Finance and the Commerce Ministers appear to have reconciled themselves to the current trend of the appreciation of the external value of the rupee. The ball is now in the court of the Reserve Bank of India. Its instruments are limited. In dealing with the issue, one needs to take a total view of the consequences of the appreciation of the currency.

It certainly affects exports but the impact is not uniform among the sectors. Labour-intensive industries, such as textiles, are hit the hardest. In the information technology sector, the consequences are again varied across firms, with some protecting themselves with a good hedging strategy.

Those industries where imports constitute a large proportion, such as gems and jewellery or cashews do benefit from the strengthening value of the rupee. The impact of the steep rise in the dollar price of oil has been cushioned.

The overall effect on imports is welcome as they constitute one-fifth of the gross domestic product. There is a complacent view that the trends in the US economy cannot affect India because it is no longer the dominant partner in foreign trade. The world is now integrated. What happens in the US affects Europe and Japan which in turn will impact India.

Lawrence Klein built a world macro model called Project Link to measure such effects. The Institute of Economic Growth is a partner in the project. It should be able to throw some light on the matter. Since the RBI seems to be at the end of the tether so far as market intervention is concerned the only solution seems to be to bring in some physical controls on the inflow of funds, such as a ceiling on portfolio investment, lock-in period, Tobin tax, etc. Some of these measures were employed with satisfactory results in Thailand during the baht crisis last December.

A. Seshan e-mail