We shouldn’t forget the Foreign Exchange Regulation Act (FERA) yet. The second half of the Preamble to FERA (1973) said this was legislation “for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest of the economic development of the country”. Given our foreign exchange reserves, all that has changed is that instead of conserving foreign exchange resources, the central bank now conserves the exchange rate. If an economy does well, as India’s is, one can’t prevent currency appreciation.

Moses kept telling the Pharaoh “let my people go” and when the Pharaoh didn’t listen, Egypt was visited with ten plagues. Not letting the rupee go is not without its plagues. Not only have economies done well when currency appreciates, the Chinese example notwithstanding, it is impossible to maintain under-valuation when capital flows aren’t restricted. RBI highlights rupee appreciation against US dollar, euro, pound and yen, especially the first. What is important is not just these currencies, but others too, and the real exchange rate, not the nominal one. Once one does that, depending on the index used, evidence on rupee appreciation is much more suspect.

But we will not allow the exchange rate to be completely determined in the market and will mess around with market forces. Apart from everything else, exporters and the commerce ministry will scream blue murder and we also have this notion about separating speculation-driven volatility from secular trends. So fix some arbitrary rupee/ dollar rate, perhaps allowing for appreciation of 10 paise a month or something like that and buy up dollars to preserve that reference rate.

... contd.