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The media’s stand on the rupee reveals an unpleasant truth

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Oscar Wilde’s famous lines in the Importance of Being Earnest have never seemed so contemporary: “Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.” DNA reflects common wisom in media when it reports:

Raghuram Rajan, currently the chief economic advisor and is scheduled to take over as the next governor of the Reserve Bank of India (RBI), is one such economist [one who is convinced of Friedman’s thesis that inflation is a monetary phenomenon]. In fact, Rajan has clearly pointed out in his earlier writings that the RBI should simply concentrate on managing inflation.

As Rajan wrote in a 2008 article, along with Eswar Prasad: “The RBI already has a medium-term inflation objective of 5%… But the central bank is also held responsible, in political and public circles, for a stable exchange rate. The RBI has gamely taken on this additional objective, but with essentially one instrument, the interest rate, at its disposal, it performs a high-wire balancing act.”

And given this, the RBI ends up being neither here nor there. As Rajan put it: “What is wrong with this? Simple that by trying to do too many things at once, the RBI risks doing none of them well.”

Hence, Rajan felt that the RBI should ‘just’ focus on controlling inflation. As he wrote in the 2008 Report of the Committee on Financial Sector Reforms: “The RBI can best serve the cause of growth by focusing on controlling inflation and intervening in currency markets only to limit excessive volatility… an exchange rate that reflects fundamentals tends not to move sharply, and serves the cause of stability.”

The trouble is that the RBI has moved on from a single-minded focus on inflation since the days of Bimal Jalan and tends to follow what experts refer to as the ‘multiple indicator approach’. The central bank now looks at a range of indicators from inflation to capital flows and even the exchange rate. Though at times the objectives the RBI is trying to achieve, are at odds.

This is what is happening currently. The RBI is trying to control inflation, accelerate economic growth and stabilise the value of the rupee, all at the same time. Something which is not possible. Rajan understands this well enough. “The RBI’s objective could be restated as low inflation, and growth consistent with the economy’s potential. They amount to essentially the same thing! But it would let the RBI off the hook for targeting the exchange rate. And that is the key point,” Rajan wrote in the 2008 article cited earlier.

Rajan’s writing suggests that he believes in letting the currency finding its right value. This puts him at odds with the current RBI policy of defending the rupee at around 60-61. If he allows the rupee to fall and find its right value, it would make him terribly unpopular with the political class. Also, do nothing might be a good theoretical strategy, but an RBI governor needs to be seen doing something to defend the rupee.

In any half-way decent export oriented economy a fall in the currency is seen as a great opportunity. The reaction of India’s media, both print and electronic, a puppet of big business, makes it clear that India is the diametric opposite of an export economy. Imports are hurting; that is why the fall of the rupee is cause for such strident and public incoherence.

If you were not aware of this fact, you might want to look at many different sources. Nothing will tell you anything different from what TradingEconomics says:

India recorded a trade deficit of 715.31 INR Billion in June of 2013. Balance of Trade in India is reported by the Ministry of Commerce and Industry. India Balance of Trade averaged -120.37 INR Billion from 1978 until 2013, reaching an all time high of 13.91 INR Billion in April of 1991 and a record low of -1111.46 INR Billion in October of 2012.

Another name for an imports-based economy is banana republic. In such economies it is not unusual for complete novices to influence foreign relations. Super-powers, even regional super-powers, seldom come to this.

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Written by Arhopala Bazaloides

August 8, 2013 at 8:27 pm

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