Letting the rupee slide isn’t the answer |
By Tanay Dalal
A recent editorial in The Indian Express titled ‘RBI shores up rupee. It may be good to let it be’ (December 30), suggests that the RBI should stop limiting rupee depreciation, to reach a fair value decided by trade and capital flows. I disagree. The RBI is facing an optimisation problem — how to bring the rupee to levels seen as “fair”, while minimising shocks to terms of trade and confidence, limiting any loss on corporate balance sheets, and maintaining relative health in term of foreign exchange reserves.
The idea of fair value referred to in the editorial is close to the concept of equilibrium exchange rates. It suggests long-term shifts in Real Effective Exchange rates (REER) take........