By Prof. Rudra Sensarma
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| Prof. Rudra Sensarma |
The rupee has received a lot of attention in the last few
months ever since it went into what seemed like a free fall. Recently I was
asked by a couple of regional media representatives to comment on the issue. These
interviews gave me an opportunity to classify my thoughts into two parts, the
general impact and the impact on the Kerala economy.
The RBI has actually been doing a fine job of managing volatility
in the currency market (the standard deviation of exchange rate is lower right
now compared with previous months or years!). But the question is whether it is
fighting a losing battle with no end in sight especially if speculators start
believing that the central bank is running out of forex reserves. Of course current
estimates say our reserves are sufficient to cover six months of imports;
certainly a more comfortable scenario than in 1990-91 when it was barely
sufficient for three weeks of imports. What can be done now? I believe the real
issue is that the policy makers should do the right thing and not the easy
thing. Capital controls are easy to impose but will the recent control measures
help the government buy time till the elections? The right thing to do is to
take bold decisions that will increase the inflow of foreign currency through higher
exports, remittances, investments (portfolio and direct). The new RBI governor took charge
on 5th September and the initial signs make one hopeful that we may
not have to wait till a new government takes charge before we see some bold
decisions.
