Has Reserve Bank of India got its exchange rate strategy wrong?

There are again questions over what India should do with Rupee. Should its allow Rupee to appreciate or depreciate?

Niranjan takes you through many such questions:

The steady appreciation of the Indian rupee this year has led to fears that Indian exports have been priced out of global markets. Three of the four measures of the real effective exchange rate (REER) tracked by the Reserve Bank of India (RBI) show that the rupee is grossly overvalued.

Another group of critics makes exactly the opposite point. The build-up of forex reserves shows that RBI has been intervening too heavily in the foreign exchange market to keep the rupee down, they argue. A central bank committed to an inflation target should not be so focused on managing the exchange rate.

The Indian central bank thus finds itself trapped in a pincer—between those who accuse it of allowing the rupee to appreciate too much and those who insist that it is too focused on keeping the rupee down.

Has India got its exchange rate policy all wrong?

He points to some evidence which shows things are hardly conclusive.

Such episodes generate the same dilemmas. Should the currency be allowed to appreciate? Should the central bank step in to prevent exports becoming uncompetitive? To what extent should it worry about foreign exchange intervention creating domestic excess liquidity problems? Should it put up temporary capital controls?

Well, all these questions were fine till RBI was not at an inflation targeting central bank. With inflation targeting framework under the belt, talks about RBI intervening in currency should not be there barring some emergencies.

2 Responses to “Has Reserve Bank of India got its exchange rate strategy wrong?”

  1. Muhammad Anees Says:

    To this looks like we need involving some qualitative analytics as part of our predictive models for macroeconomic target settings including rates for forex, interest and savings. Until, we we do so, mostly, our policy stances based on mere quantitative models in somecases will be felt like not feasible as an outcome or solution.

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