With the rupee ending at 52.67 to the dollar yesterday, up 7% since May, thanks to a surge in FII inflows?$3.8 billion in September and $1.8 billion in the first 11 days of this month?experts have begun asking RBI to begin buying dollars to weaken the rupee. This, they say, will give RBI more reserves to deal with any possible future forex crisis and, more important, will give a boost to exports as well as discourage imports. The government, on the other hand, wants a stronger rupee for what it does to lower inflationary impulses as well as to keep oil subsidies a little bit under check.
Interesting research by FE columnist and chairman of Oxus Research & Investments Surjit Bhalla?a great proponent of weak currencies to boost growth ? la China?makes a distinction between devaluations from a position of strength and those from a position of weakness due to, say, a weakening current account. The former, he shows, boosts exports; the latter doesn?t. While economists can argue over the correctness of Bhalla?s modelling when his book on this is finally out, it?s instructive to keep in mind that India?s exports did very well while the rupee was rock-steady in the 2003-08 period thanks to RBI intervention?forex reserves rose from $75 billion to $310 billion?but didn?t do well in recent years when the rupee weakened due to structural weaknesses in the economy. For now, it would be a good idea to let the rupee be.
