Our 'rupee madness' swamps Amartya Sen's voice of sanity

The rupee’s sharp slide of recent weeks has induced a frenzy of hysteria and lamentation among ordinary folks, and occasionally among informed commentators too. And this morning, as the rupee breached the 54-to-the-dollar mark, it has again triggered another round of frenetic ‘rupee rage’. We’re running around like headless chicken, looking for someone, anyone, to blame.

As befits our times, when virtually everyone has an opinion on everything, including on arcane matters of monetary policy and exchange rate determination that befuddle and humble even the most keen economic minds, the battle-cry for the RBI to do something, anything, to check the rupee’s slide has acquired a manic pitch.

It’s not as if the RBI has been sitting idle. It’s been tweaking rates to incentivise NRI inflows. And despite public comments by its policy mandarins reflecting the RBI’s stated position that it does not intervene in currency markets to set exchange rates and will only intervene in periods of excessive volatility, the RBI has actually been selling US dollars to try and check the rupee’s fall.

Indicatively, in September, the RBI sold dollars to a value of $845 million, and followed it up in October by selling an additional $943 million. Given that its war-chest of foreign exchange isn’t exactly overflowing with dollars, the RBI has been intervening only on the margins. ( Thank god for that! )

And it’s been fighting a losing proposition. For despite that intervention, the rupee is now sharply lower than it was in September. This just goes to establish the point that RBI officials and economic thinkers have been making: that although there are some home-grown reasons - such as high inflation, a slowdown in the economy and a general puncturing of investor confidence in the India story in the short term - that account for the rupee’s sharp fall of recent times, it owes rather more to external factors that are beyond the policymakers’ control, such as widespread risk aversion among global investors triggered by concerns of a collapse of the euro.

Overnight, the euro slipped below the psychological threshold of 1.30 to the dollar. Virtually every asset class - from gold to crude oil to copper - was battered as investors stampeded to the safety of the US dollar.

As C Rangarajan , former RBI governor who now chairs the Prime Minister’s Economic Advisory Council, said, “The behaviour of the rupee is also a reflection of the behaviour of the dollar… There is very little that can be done.”

Going against the tide of investor sentiment - in the way that the RBI is being called upon to do by selling the dollar when everyone else is flocking to it - is a bit like running up an escalator that’s going down. It takes a lot of running to stay in the same place. And, as happened with the rupee, if economic fundamentals are further dragging you down, you only end up sliding down for all your pretense of running up.

Indeed, the $2 billion that the RBI coughed up in September and October to defend the rupee against its own conviction, but evidently in order to be seen to be doing something, is now money down the drain.To intervene even more is a bit like swimming against the tsunami currents that today sweep the currency markets: it would only amount to throwing good money after bad. At the end of the day, it will leave us the worse off for it.

It isn’t easy to keep your head when everyone around you is losing theirs, but Nobel Prize-winning economic philosopher Amartya Sen makes a forceful intervention and injects the voice of sanity to this squawk fest that passes for informed debate.

The rupee’s fall, Sen noted in a media interaction , isn’t quite the train wreck that it’s made out to be. It’s wrong to say that India is doomed on account of a falling currency, when in fact, countries like China, he noted, have gone to extraordinary lengths to artificially deflate their currency - and had profited from it in terms of higher exports.

Sen’s point about the boost to exports from a currency depreciation conforms to classic economic theory. However, there are other factors that determine a country’s ability to leverage an undervalued currency for higher exports, including, as is the case in China, labour productivity gains that far outstrip the wage price spiral we’ve seen in recent times. India has signally failed on that count, which is one reason why its gains in terms of higher exports may not be proportionate to the rupee’s fall.

But Sen’s philosophical point advances the merits of maintaining a cool head in times like this, not the ‘sky-is-falling reflex’ that we’ve exhibited thus far in response to the rupee’s slide. Even if, as is widely prophesied, the rupee does slide to 59 to the dollar, there’s a case for tuning into voices of sanity and allowing them to heal us of our ‘rupee madness’.