Wednesday, August 07, 2013

Was it worth picking a battle on the rupee?

For the last month, financial and monetary policy has pursued the goal of preventing rupee depreciation. I have a column in the Economic Times today titled Should we have picked this battle?


  1. While so much has been said in criticism of RBI and its stewards, i have not come across many implementable suggestions or ideas. RBI has its vast limitations. Am sure everyone knows intervention never works - BOJ must have been a guiding spirit to the world on that point. If we leave it to market forces, 70 or even 80 will not 'shocking' levels - so much for free markets. Roughly $170 billion comes up for maturity in the next 6-8 months and corporate india faces its worst times ahead (compared to the cost that devolves on the government in such a scenario, the price of defending now should pale, methinks)

    1. Yes, but that risk is to be hedged by the corporates in the forex market. And, corps can do it and they do it all the time. So, whats the problem again? What do you mean by so much for "free markets"? What would you rather have? Corporates offload their business risk on the govt? Why is the govt or RBI responsible for business decisions and business risk? Does any business not know the fx risk that they taken when they borrow in other currencies? Do they not have avenues to hedge away that fx risk? Even now, one can lock in fx rates at 60 for future borrowing. Its a part of doing business in a global economy.

  2. Dear Ajay, it is always delightful to read your articles particularly on macroeconomic studies. Also read yours and Ms. Patnaik's study in international journal and it is very insightful ( I rarely miss Ms.Patnaik's articles in Indian Express).

    While I do agree that currency management could have been done better in recent times. Rather no management would have been ideal. I would reserve my criticisms for RBI's inflation management and Gold import curbs. This is because RBI has fought against the inflation possibly in the best manner given the tools it had and it has. So much so that RBI took stand against the Government and the Minister. Had RBI paid heed to Economic advisors and FM one year ago and reduced the interest rates, rupee level and inflation levels could have been worse. This is not suggest that RBI was foresighted enough to anticipate US FED's comment. On inflation side, RBI hasn't done a bad job at all.

    On yellow metal, it is ideal to have conducive environment but what do you do if Gold continues to contribute such a large deficit month on month. I mean how long would you bleed before you treat yourself with first aid medicines. Time had ripened for consumers of gold/ETF investors to pay extra money if they wanted to dent the exchequer’s pocket. As someone who started his career in physical bullion market, I do agree that investments in gold is many a times done out of insecurity besides seasonal requirements or diversification requirements but how much insecurity one possesses that entire BoP is greatly contributed by Gold alone. I am sure once the mad rush will mallow down so would be the mad measures. Sometimes you take tough or extreme measures unwillingly because you don’t have any option left.

    Happy to hear back from you.. Many thanks for sharing this article.

    Jinendra Shah

  3. Read your article today in the newspaper and I kept thinking that you seem to be in agreement with Raghuram Rajan on using forex reserves at the right time to shore up the currency. The implication being that now is not the time and it is better to save the gunpowder for later. I hope I didn't read you wrong. Perhaps you were advocating complete non-intervention in the currency markets.

    But are our corporations sophisticated enough to use derivatives? They don't seem very prudent with their penchant for borrowing in foreign currencies (ECBs if I am not wrong) when there were warning signs everywhere. Can we trust the same corporations from not misusing derivatives or in fact turning into derivative traders full time. I might be sounding ridiculous but we have seen crazier things in the market.

    Even if big corporations are savvy enough to use derivatives, I do not think the small and medium industries would be able to use these. I don't know if we want them to outsource these responsibilities to the innumerable crooks and thugs in our financial industry.

    The best solution is a stable, non-innovative financial sector headed by an RBI with the clear mandate to control inflation. Financial innovations tend to lead to financial crises and a poor mismanaged country cannot afford to have them. We need growth first.

    1. Why are you afraid of derivatives? Derivatives have been around for decades and even retail investors know how to use them. Whats the big deal? And, if a business doesn't use them properly, they will fail. So what, big deal! Why do people forget that an essential (or maybe, "the" essential) part of capitalism is the dying and rebirth of incompetent companies.

      "The best solution is a stable, non-innovative financial sector "
      I thought that was what RBI has been touting itself to be by delaying on credit derivatives, interest rate derivatives and whole host of "innovations" which really isn't innovation since it has been around for decades in other countries.
      So, what happened suddenly?

      What innovation do you think the RBI is involved in today that it shouldn't be involved in? Do you really think that basic derivatives like forex futures and option are "innovations" even though they have been around for a long, long time?

      Sure, you can argue about going slow with true innovations, but we are hardly near the edge of innovation in finance in India.

      I guess you would be happy with the stealth, persistent risk of non-innovation than the disruptive, sudden risk of innovation. I doubt that is in the interest of a young, growing population.

    2. In response to I might change my wording from "non-innovative" to "non-changing" or something like that. Financial reforms should a lower priority item right now. The economy has to be on a stable growth path before engaging in financial reforms. That's the path followed by Japan, Korea, Taiwan and China. Of course, we in India are always trying to different by having service sector growth before manufacturing growth (if it ever happens) etc.

      There is not a lot of cutting-edge happening in India. By innovation, I only meant something new to India or something new being adapted for the Indian environment.

  4. I read your first article attempting the government not to get into this fight at this time. They did not heed your advice - your prophetic advice. But then again what do you know about how to go and buy votes (err, get votes I mean) in an election!!

    The cynic in me is saying that the RBI was pressurized to engage in this folly by the government in a failed attempt to bring inflation down. Low inflation and vote buying (oops I did it again.. I mean vote getting) schemes such as FSB was supposed to be the go-to-election strategy of the Congress!!!


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