Who Cares If The Rupee Keeps Falling?

[katharnak]

[img]http://graphics8.nytimes.com/images/2012/05/23/world/asia/23-Gasoline-IndiaInk/23-Gasoline-IndiaInk-blog480.jpg[/img]Prashanth Vishwanathan/Bloomberg NewsGasoline drips into a container at a Bharat Petroleum Corporation gas station in New Delhi, May 20, 2012.
As the Indian rupee continues to fall in global markets, many respected analysts contend that the weakening currency signals the failure of the economic policies of the Indian government. In an [url="http://www.business-standard.com/india/news/shankar-acharyaexchange-rate-economics-bites-back/474865/"]op-ed column[/url] last weekend in The Business Standard, a leading business daily in India, Shankar Acharya said: “The real cause of the rupee’s weakness is the relentless deterioration in our economic policies in recent years. A falling rupee is simply a symptom of the underlying disease: unsound economic policies.” Mr. Acharya was part of the team that helped design the original economic reforms of 1991 and is a former chief economic adviser to the Indian government so his words should be taken seriously.
In a similar vein, in a [url="http://online.wsj.com/article/SB10001424052702303610504577417820803375332.html?mod=WSJINDIA_hpp_MIDDLESecondNews"]recent op-ed column[/url] in The Wall Street Journal, Eswar Prasad wrote: “The falling Indian rupee, which Monday closed at an all-time low relative to the dollar, is a perfect metaphor for the free fall India’s economy seems to be in.” He went on to lay the blame squarely on the government’s failure to pursue necessary economic reforms, contending that the “real message” of the depreciating currency is that “India’s policy making has lost its way.” Mr. Prasad is a professor at Cornell and a former senior official of the International Monetary Fund, and his voice too must be given heed.
With all due respect to these eminent economists and others in the media who have been opining in a similar fashion, the charge that the rupee’s misfortune principally reflects the government’s policy failures cannot be decisively established on the basis of the evidence at hand. If the Indian government was in the dock, and Anglo-American rules of evidence were applied, the verdict would have to be “not guilty,” or, at best, “not proved,” if Scottish rules were used instead.
The rupee’s downward trajectory, if it were drawn on paper, could best be seen as a Rorschach test of analysts’ hopes and expectations. There is no doubt that the current Indian government has failed to deliver on much-needed “second generation” reforms, as many observers, including [url="http://india.blogs.nytimes.com/2012/03/16/budget-2012-analysis-did-mukherjee-deliver/"]myself here in India Ink[/url], have noted. This fact – driven by the reality that good economics is often bad politics in a democracy, as I argued late last year in an [url="http://www.business-standard.com/india/news/vivek-dehejia-when-good-politics-is-bad-economics/458769/"]op-ed column[/url] in the Business Standard – is surely regrettable.
It would indeed be a form of cosmic justice if those policy failures were now coming back to haunt Prime Minister Manmohan Singh and his governing Indian National Congress Party in the form of an ever-cheapening rupee.
But economics isn’t a morality play, nor is the rupee’s decline a parable that may be used to goad recalcitrant politicians to get back on the high road of economic reform.
Any serious scholar of the economics of exchange rates will tell you that it would be folly to pin the cause of a particular currency’s movement, up or down, uniquely, or even largely, on a single driving cause, whether a policy failure or anything else. There are simply too many suspects on the loose to blame the government alone.
So while Mr. Acharya and Mr. Prasad are right to point to burgeoning fiscal and current account deficits as likely proximate causes for the rupee’s fall, an equally important cause, over which the government has no control, is rising commodity prices, principally of oil, on world markets. As a rule of thumb, currencies of oil importers fare poorly when the oil price is high or expected to rise, and the reverse is true for oil exporters.
For instance, Canada’s exchange rate with the U.S. dollar, which has fluctuated wildly over the past decade between a low of about 66 cents and a high above parity, can largely be explained by the vicissitudes of the price of oil. It’s therefore no surprise that India, which is heavily reliant on foreign oil, will see a drop in the value of its currency when oil and other commodity prices are high and expected to remain so.
A second and equally important factor beyond the Indian government’s control is the precarious state of the European economies and the very real possibility of the breakup of the euro zone, with an almost certain default by Greece looming in the near future, and possible fiscal ruin in Spain and Italy likely not too far behind. In times of crisis – and this is certainly one for the global economy – there is a flight to a safe haven, which for the last half-century or more has been the U.S. dollar.
Thus, the Indian rupee’s weakness, the flip side of which is the strength of the U.S. dollar, is as much about investors’ desire to park their assets in dollars, and shun volatile emerging market currencies, while the global economy is in turmoil.
It’s true that the rupee has [url="http://www.bloomberg.com/news/2012-05-20/yield-premium-nearing-record-spurs-subsidy-review-india-credit.html"]fared worse[/url] than other important Asian currencies in recent months, which suggests that idiosyncratic, India-specific factors may be at work. But this argument misses out on the lessons of modern economic theory: the idea that a “strong” currency is a necessary correlate to a strong economy is an old discredited mercantilist idea, but with an unshakeable intuitive appeal to the layperson and a surprising resilience even among sophisticated economists. That’s why there were “parity parties” in Canada when the dollar breached 1:1 with the U.S. dollar a few years ago.
Popular the idea may be, but it’s still wrong. Rather, the “right” value of a currency is determined in foreign exchange markets, and there’s nothing inherently good or bad about a currency going up or down, any more than it would be good or bad for the price of oil, or bananas, or anything else to go up or down in response to market conditions.
Sometimes, in their zeal to see a fact as evidence in support of their favored policies, analysts forget the most basic lesson of all that economics has to teach: often, it’s as simple as supply and demand.


http://india.blogs.nytimes.com/2012/05/24/who-cares-if-the-rupee-keeps-falling/

[summit]

summary enti baa

[karna11]

matter entoo seppu baa intha chadivee oopikaa ledhuu office loo

[bhargava_v]

[quote name='summit' timestamp='1337873820' post='1301856317']
summary enti baa
[/quote]
[quote name='karna11' timestamp='1337874107' post='1301856354']
matter entoo seppu baa intha chadivee oopikaa ledhuu office loo
[/quote]

no one cares ani septhunadu