Recent developments have been good for the rupee and bad for interest rates. Here again, if left to global forces, without our proactive policies of raising interest rates and imposing capital controls, we would have been facing better prospects than we are doing today. Global market developments put pressure on emerging market currencies and the most affected have been those with a large current account deficit, whose currencies depreciated the most. This provided these countries with an adjustment mechanism through which exports would become cheaper and imports more expensive and thereby, over time, the current account deficit would become smaller. It has been argued in recent days that Indian exports and imports have zero price elasticity and thus a depreciation does not help and so must be prevented. Interestingly, the opposite argument was offered when the rupee was appreciating that it would make Indian exports uncompetitive. Also, the argument for imposing import duties, or giving export subsidies to reduce the CAD, depends on the price elasticity of tradables. After the 1991 crisis, the Indian rupee was devalued by 25 per cent. This helped in reducing the CAD.
Higher interest rates to defend the rupee were supposed to be a temporary measure. Now that growth figures are showing a decline, and the rupee has stabilised, the government must immediately reverse those measures. A tight monetary policy is the last thing the Indian economy needs today. Governor designate Raghuram Rajan should call a special meeting of the monetary policy committee on September 5, the day he takes charge, and revisit the policy of high interest rates.