Rupee appreciation, confusion continues

Number of media reports have informed us that exporters all over India are reeling due to sudden rupee appreciation. Infact, it is not just the small exporters but even giants like Infosyswhose Q1 (2007-08) results have been disappointing due to appreciating rupee. If giants like Infosys that have well informed financial market professionals on its payroll can do little what is the hope for small time exporters. Gems & Jewellery exporters from Surat are closing shop already

RBI provided some relief to select exporters on Friday (13 July 2007) by reducing the rupee credit interest rates.

Earlier the commercial banks could charge interest rate not exceeding Prime Lending rate minus 2.5% (i.e. PLR is 10% then for export credit Banks could not charge more than 7.5%). Now this rate has been increased to 4.5%.

Subir Gokarn in Business Standard says we should look at costs and benefits of rupee appreciation to arrive at a more meaningful debate. He is right as it is high time we understand each mechanics clearly. For instance, why does RBI provide this benefit to exporters and not prevent rupee appreciation? What are the costs and benefits? I have no clue.

He says RBI must have analysed costs are more than benefits of preventing rupee appreciation and hence allowed rupee to appreciate. I think RBI has some top people working for it and must have done that exercise.

Why doesn’t RBI communicate its exchange rate policy to the public? I also hear stories that importers who should have been happy with rupee appreciating, are not very gung-ho either. They are confused and do not have any clarity on what the exchange rate could be as one never knows whether RBI would intervene or not.

Someone might ask why not look at available research and understand what is happening? My answer to that is most research is US specific and the same framework may not be applicable to emerging markets like India. I believe that every country is different and has its own set of intricacies. So these papers would provide a general idea but not a India specific one. This issue of exchange rate appreciation has become very important and needs a specific solution.

Update: I just forgot to mention this. The above policy measure by RBI was done as Commerce Ministry announced  number of measures for ailing exporters.

Rajeev Malik summarises the rupee appreciation case nicely.