When the RBI stood on the sidelines of the foreign exchange market and allowed the rupee to appreciate on Wednesday, one thing became clear: the policy framework in which the RBI has been operating needs to change. Many months of pushing liquidity into the system by buying dollars to prevent rupee appreciation, while at the same time hiking interest rates and CRR to suck out this liquidity, is not a sustainable policy. Not only does evidence from around the world show that most countries are unable to sustain sterlised intervention because it comes at a high cost to the domestic economy, evidence from the past has shown that Indias currency policy has led to a loss of autonomy in monetary policy. As the dollar depreciates worldwide, there is inevitably going to be pressure on the rupee to appreciate in terms of the US dollar. If in the next few months the RBI goes back to protecting the dollar, it would have to raise interest rates even further. Can we afford to do this Its consequencerising interest ratesis already hurting Indian consumers and producers and could well choke off domestic growth.
This is too high a price to pay for protecting exports. Moreover, it is not as if the current policy is not hurting exports. First, rising inflation reduces export competitiveness. Second, the incredibly shortsighted response of the government in terms of curbing exports of commodities like milk power, cement, wheat and iron ore whose domestic prices are rising, is going to make India an unreliable exporter. Chinese steel mills are screaming after the export tax on iron ore. Even if exports are cheap, it matters little if buyers start seeing India as a control raj. Instead of hurting Indian exports this way, while claiming to be protecting them, the rupee must be allowed to move. Moreover, even if exporters were being effectively protected by this policy, it is not sustainable. Exports need to be competitive in world markets on value. Moreover, who ever decided that exports are more important than the rest of the country There is no evidence to suggest that a rising rupee will harm the overall Indian economy. It may do a lot of good.