We have touched on exchange rates, several times over the past few months. Following the principle that as a first approximation selecting that which is newsworthy is a reasonable basis of choice for a columnist, we re-visit the matter this week once again.

The external value of the rupee has traditionally caught the headlines for the wrong reasons ? when the rupee was in, or in danger of going into, a slide and the fear of another exchange crisis rushed into the forefront of our minds. This time round, the cause is different. Another tradition ? also overdue for change ? is the exclusive association of the external value of the rupee with the rupee-US dollar exchange rate. One wonders when was it in the popular mind, that this former jewel in the crown shed its long association with the pound sterling? In any event, the developments of the past year-and-a-half should prepare us for the next transition into modernity, with its new, somewhat more intricate rules. Complexity, after all, is the price of advancement ? in the physical and natural world, as also in the mundane one of business.

In the thirteen and a half months between end-March 2002 and the middle of May 2003, the euro gained 32 per cent against the US dollar, rising from 87 cents to over 115 cents. In the same period, the Japanese yen moved from 133 yen to 116 yen to the dollar, a gain of 14.5 per cent, while the British pound gained 14 per cent. And during this period, the Indian rupee gained 3.5 per cent against the US dollar; but lost 27 per cent vis-a-vis the euro, 10 per cent to the yen and 9 per cent to the British pound.

The loss in value of the dollar against the other major currencies was not smooth over the period, but in patches. The first in spring of 2002, the second in late autumn and the latest round over the past three months. The rupee has been caught in this storm, but by and large has stayed in balance. Thanks in large measure to our long back having liberated ourselves from the yoke of tightly managed exchange rate bands.

Strange things have been happening. Exporters have been in a rush to sell their forward earnings. A nice change from the days when the Reserve Bank of India (RBI) had to coerce so many to bring their money back into the country. And importers are not in a rush to buy in advance. We have seen that on a net basis, ie, taking all the major currencies together, the Indian rupee has not appreciated in nominal terms. But the change in mindset and practices amongst the fraternity of market players in the foreign exchange market should eventually add some value to the rupee, offsetting perhaps by a small measure the effects of differentially higher inflation in India: a transactional efficiency gain flowing from the transition into a paradigm that is not besotted with perpetual shortage of dollars. Manufacturing and the lending businesses have adjusted themselves to the absence of perpetual shortage, the manna from heaven that the license-control raj bestowed on its favoured citizenry. Time that the foreign exchange market did the same.

Coming finally to measures. The RBI releases the value of its foreign currency assets in US dollars. The accuracy of this measure is vulnerable to large changes amongst the major currencies, since these assets are invested in government securities denominated in all major currencies. Thus, between 28 March and 9 May 2003, the increment in foreign currency assets of the RBI was $4.09 billion. This columnist?s humble guess is that nearly half of this was on account of appreciation of euro, sterling and yen denominated assets due to cross-currency movements. That is, the real increase in foreign currency assets which is equal to the overall balance of payments surplus for the period was a bit over $2 bn.

Though it is not a widespread practice, the RBI could perhaps consider declaring the value of its outstanding foreign currency assets in Special Drawing Rights. It might perhaps send out better signals and help prevent domestic currency markets from over-shooting.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)