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Wednesday, August 14, 2013

Will the capital controls to defend the rupee work?

We will wake up to the 66th anniversary of free India with reduced freedom. Today, new capital controls were announced. Once every decade, we have to trot out Did the Indian capital controls work as a tool for macroeconomic policy?

11 comments:

  1. What is your alternative recommendation? Say it in 5 sentences, please.

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  2. and if you want a strong rupee, then
    1) abolish all government restrictions on property and business
    2) privatize all public assets
    3) abolish all taxes, outlaw govt borrowing and fund govt. by direct money printing by RBI - constitutionally limited to ~5% of monetary base.

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  3. The issue with a floating rate when your economy is fundamentally weak, is that speculation builds up and that creates a momentum which pushes the currency to overshoot its fundamental value. That corrects over time. but meanwhile, it destroys several businesses and may put a permanent dent in your economy.
    At such times, every country (specially developing ones) should go for mild capital controls and other restrictions to bring down speculation, wasteful spending and panic.

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    Replies
    1. I love your first sentence. Haha. The issue isn't the speculation. The issue is that the economy is fundamentally weak. Lets talk about fixing that. Cheers.

      If the economy is fundamentally weak, why shouldn't the currency be weak. That is how it should be. Why be afraid of a weak currency when it helps the country's exports and fixes the fundamental weakness?

      In yet other words, why only focus on the symptom but not the underlying problem? That never works.

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  4. I agree with Dr. Shah.

    Actually the fundamental value of the rupee is just a concept, and its best estimate is the market rate, not something the Ministry of Finance or the Reserve Bank decides. Consequently, long term currency movements in truly floating rate regimes are less subject to sudden shocks. Your assertion that currency fluctuations destroys businesses and may damage the economy permanently, appears to be misplaced.

    For example, if you look at the US Dollar to Euro exchange rate over the past 5 years, the Euro has varied from US$1 = Euro 0.67 to US$1 = Euro 0.83, and some of these changes have happened rapidly in just 6 months. However, businesses in both currency areas did not suffer inordinately, and the economies have generally performed as expected.

    The risk of believing in some pre-ordained fundamental value of the rupee is that the authorities may take steps to approach that rate and then get really whacked by the market. Case in point is Thailand at the start of the Asian crisis in 1997, when the Thai authorities tried to defend the Baht with severe medium-term consequences.

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  5. If the fundamental inflation differential between India and the US is say 8% a year, then the rupee should have devalued by that amount each year since 2009. But i think due to massive capital flows, the normal process paused for nearly 4 years and now it is rushing towards that number within 3 months. It looks to me that we still have about 12-15% of devaluation left before the Rupee will stabilize. I am not sure why people claim unilaterally that the fair value of the Rupee against the dollar is Rs.62 :) Btw how can RBI fight against large OFS markets. Hats off to Ajay for speaking his mind today in the financial porn channels today morning ;) I wish they would do a long interviews with people like him(who have a clue) rather than sychophants who just spout nonsense.

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    Replies
    1. Is there a link? It would be nice if Prof. Shah provided links to his appearances on his site or in this blog. Thanks.

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  6. This seems to be a mattha-pacchhi among intelligent fools. Just get rid of fiat paper money and bring back gold and silver coins along with free banking.

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