The web content at moneycontrol says "Ajay Shah of IGIDR".. Are you still with the faculty of IGIDR ?Regards - ShankarL&T Powai
Excellent analysis sir. You mention that the markets should discover the true exchange rate of the rupee. Assuming that our government would never cede full control, what options do you think the Indian government has in terms of currency management - fixed rates, floating rates, pegged rates, and to which reference currency?
Ajay,I get your line of reasoning and very surprised that the appreciation has not already happened...I suspect the Fed here is simply printing money with no account of how many dollars are out there in circulation.But why do you think the RBI is hell bent on maintaining a weaker rupee? I don't buy the conspiracy theory that a strong export lobby is driving this...there must be policy issues driving this. My knowledge of the Indian polity is limited, reuest you to deliberate more on it and share your insights.
Ajay,If the central bank were to let the rupee go, what is the risk that it might actually depreciate and cause negative feedback for inflation? Is that a crazy idea given dollar weakness? The problem in my view is that the world seems to be turning negative on countries with current account deficits, and india does have financing needs, small as they may be.
Letting the rupee go will not depreciate it - it is not a plausible idea because RBI has been buying dollars hence it is holding close to 40. If it stops buying, any rupee depreciation cannot be attributed to this action.I am not denying the possibility that the rupee can depreciate given how hard it is to forecast currency movements, but it cannot be due to RBI letting go.
The linkage between Economics and Power are key to understanding the dollar enigma. For all the hype of soviet union it turned out to be pretty much a defunct power by the 60's with limited global reach. US declared itself the winner in 1971 by delinking its currency from the gold standard, something that has never happened in the history of this world. And its not to anyones surprise that this declaration of total victory went completly unchallenged either by Europe or any other part of the world. The other part of turning the dollar into a commodity rather than a currency was effected mainly by ensuring that OPEC sells oil in dollars and dollars only, which need to be bought by all the countries. Any deviation from this policy would be punishable by war or sanctions ( eg. iraq)The world is divided in 2 parts, people who have power and folks who dont have, and this has nothing to do with markings on the globe. Even among those who have power there is the phenomenon of "First among equals", with the leaders in the US being the first and probably in the 3rd world etc. comming in as last. So if the folks in the bottom are seen to disrupt the current scheme of things then folks like you and me need to be liberated from these guys. Specifically in the case of India, the currency was gaining ground with BJP in rule. BJP was good for india because it used whatever power it had , tried to increase it by declaring India as a nuclear state (which was countered quickly by pakistan (read US)). But in any case it showed that had the will to use its muscle as required unlike the Congress party whose aim is retain power by getting any help ( external if necessary ). So India keeps buying junk bonds ( read dollars) to please the US administration.
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