10-22-2007, 07:27 AM
Very good article
<b>Rupee rising against $? Not all that much</b>!<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->It is claimed that India has suffered a terrible 20 per cent appreciation from Rs 49 a dollar in June 2002 to Rs 39 a dollar today. It seems obvious to most people that such an INR appreciation is completely inappropriate.
However, we need to look deeper at what was going on. Over the same period, the USD has been losing ground, as part of the adjustments required for narrowing the massive US current account deficit. Going by the US Fed's 'nominal major currencies index,' the USD lost 29.43% over this same period. Going by the 'nominal broad dollar index,' the USD lost 20.43% over this same period.
We in India are so used to running a pegged exchange rate to the USD that we assume that an INR appreciation against the USD is an appreciation. But if the USD is dropping and we try to hang on to a nominal value of the USD, then we are trying to force a depreciation of the INR. The appreciation as seen in the REER is very small (roughly 10%) when compared with that seen in the INR/USD rate.
It is claimed that INR appreciation would have a terrible impact on exports. However, the empirical evidence does not square up.
Suppose we focus on June 2002, when the rupee peaked at Rs 49 to the dollar. In the 63 months that led up to June 2002, exports growth in dollars averaged 6.97%. In the 63 months after this date, exports growth averaged 23.88%. While the REER appreciated after June 2002, monthly exports of merchandise tripled over these five years.
Any simple claims about the impact of exchange rate fluctuations on exports are not compatible with the evidence.
.....
Now the drumbeat is building up about private equity flows and participatory notes. Before policy makers accede to these requests, the track record of the RBI on thinking about economic policy needs to be re-evaluated.
There appears to be a gap between the closed economy worldview and the new India, an India that is highly globalised and has new behavioural patterns. The policy reflexes that used to work in the mid-1990s do not work today.
<!--QuoteEnd--><!--QuoteEEnd-->
<b>Rupee rising against $? Not all that much</b>!<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->It is claimed that India has suffered a terrible 20 per cent appreciation from Rs 49 a dollar in June 2002 to Rs 39 a dollar today. It seems obvious to most people that such an INR appreciation is completely inappropriate.
However, we need to look deeper at what was going on. Over the same period, the USD has been losing ground, as part of the adjustments required for narrowing the massive US current account deficit. Going by the US Fed's 'nominal major currencies index,' the USD lost 29.43% over this same period. Going by the 'nominal broad dollar index,' the USD lost 20.43% over this same period.
We in India are so used to running a pegged exchange rate to the USD that we assume that an INR appreciation against the USD is an appreciation. But if the USD is dropping and we try to hang on to a nominal value of the USD, then we are trying to force a depreciation of the INR. The appreciation as seen in the REER is very small (roughly 10%) when compared with that seen in the INR/USD rate.
It is claimed that INR appreciation would have a terrible impact on exports. However, the empirical evidence does not square up.
Suppose we focus on June 2002, when the rupee peaked at Rs 49 to the dollar. In the 63 months that led up to June 2002, exports growth in dollars averaged 6.97%. In the 63 months after this date, exports growth averaged 23.88%. While the REER appreciated after June 2002, monthly exports of merchandise tripled over these five years.
Any simple claims about the impact of exchange rate fluctuations on exports are not compatible with the evidence.
.....
Now the drumbeat is building up about private equity flows and participatory notes. Before policy makers accede to these requests, the track record of the RBI on thinking about economic policy needs to be re-evaluated.
There appears to be a gap between the closed economy worldview and the new India, an India that is highly globalised and has new behavioural patterns. The policy reflexes that used to work in the mid-1990s do not work today.
<!--QuoteEnd--><!--QuoteEEnd-->