The Reserve Bank must reconsider its rupee management policy to check volatility. The rupee fell from about 55 to a dollar in May 2013 to 68 in August that year and thereafter gradually climbed to about 60 to a dollar by the middle of 2014. Now, it is again showing signs of fragility.' The ascent right through this calendar year has coincided with an inflow of portfolio flows of about $40 billion. Nervousness in world markets, combined with declining confidence in India’s economic prospects, could lead to a reversal of these flows, taking us back to August 2013.

It is time we stopped being at the mercy of world financial flows. The trade deficit should determine our rupee value, which is not happening now. Or else, a persistent trade deficit and a rising rupee would not have co-existed. An overvalued currency subsidises unnecessary imports and undermines self-reliance, while an undervalued currency can be a drag on an energy-dependent economy like ours. Both extremes are best avoided, but that’s what the economy has been exposed to at various points of time.

A government committed to ‘Make in India’ should know that currency volatility cannot spur manufacturing. The East Asian ‘tigers’ built their manufacturing bases on the back of a stable currency regime. The usefulness of foreign inflows is exaggerated. Ajit K Ghose explains in his paper, ‘The Crowding-Out Effect of Foreign Capital’ ( Economic and Political Weekly , December 10, 2011): “Much of the increased inflow (in the developing countries in the 1990s) served to increase their foreign currency reserves rather than their investment rates.” In other words, “it leads to the crowding out of domestic capital by foreign capital.”

With our current account deficit at barely 2 per cent of our GDP, this is the right time to wean the economy away from capital flows and step up domestic savings instead.

Even the IMF, in 2012, acknowledged the need for capital controls. It’s time we tightened them.

A Srinivas Deputy Editor

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