MUMBAI, Nov 23: While India's government teeters the hard question facing Bimal Jalan, who took charge of the country's central bank on Saturday, the question uppermost on economists' minds is what he will do about an errant rupee.

The rupee has fallen six per cent against the dollar in the past three months, but there is a groundswell growing among economists that it has further to go. Jalan must decide how far and how fast. The acute currency dilemma will help keep Jalan from dwelling too much on whether the man who appointed him will still be in a job next week. If the Congress party fulfils its threat to withdraw its support for the United Front (UF) coalition, finance minister P Chidambaram will be on his way out before Jalan can get his feet under the Reserve Bank of India (RBI) desk.

The pro-depreciation camp argue that whatever the merits of the Indian economy, it is no longer isolated from the rest of the world, and Asian currencies falling anywhere between 10 and 40 per cent in the past 10 months mean India must readjust its rupee. "The feeling in Washington is that the rupee has to go down more," chief economist at the National Council of Applied Economic Research, Ashok Gulati said.

Both International Monetary Fund (IMF) and World Bank officials based there believe the rupee should drop another seven to eight per cent, he said, adding that the depreciation could accelerate in the next 15 days to one month.

Jalan, who represented India on the boards of the IMF and World Bank, will be well aware of what the Washington monetarists think, economists said. The central bank has the resources to contain any attack on the rupee, which is still a few years away from full convertibility and is traded on a shallow local market. The RBI has said it will act to quell any volatility, but has taken IMF advice to let the market determine the exchange rate.

And it has to take account of expectations of foreign investors, whose vital injections of funds into India are slowing, and judge whether a quick adjustment now is better than the soft landing it had appeared to be seeking.

"There is a general feeling the rupee should be nearer 40...and the sooner the better," argued director of the Indian Council for Research on International Economic Relations, SP Gupta.

It seems India's politicians unintentionally are doing their best to achieve that move as the recent power plays in New Delhi have caused concern in the foreign exchange market.

News the UF was refusing to bow to Congress demands to dump a coalition member, and was daring its fickle supporter to plunge India into mid-term polls, helped sink the rupee 30 paise to a fresh 21-month low at 37.75/80 to the dollar.

"Political instability is a contributory factor, but it is the economics around the world that are driving the depreciation in the rupee," Gulati said.

The central bank sent the same message in early August, when RBI deputy governor YV Reddy ended a year of stability by saying the rupee appeared overvalued on a trade weighted basis.

Jalan, in a meet the press exercise on Saturday, was not throwing any more wood on the fire.

"I've no idea," he responded to a question about what he thought was an appropriate level for the rupee. His predecessor, Chakravarty Rangarajan, alarmed by the speed of the rupee's drop from 36.80 to 37.50 last Tuesday, called time on the market. Rangarajan said the rupee's downward adjustment, within the context of Asian currency market turbulence and India's own "strong" fundamentals, had gone far enough, and the RBI would not hesitate to intervene to prevent any overshooting.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.