Bimal Jalan's panache has a clear message for the markets. They cannot speculate against the rupee in the expectation that sooner or later, the Reserve Bank will intervene to shore up the rupee. This for the simple reason that the Reserve Bank has no target exchange rate in mind. Movements in the exchange rate, the markets have been told, will continue to be market-determined.

Reserve Bank interventions in the past have been criticised because these did not let the market arrive at a `credible' exchange rate (as it were). Sure enough, there can be an over-correction. In that case, so went the argument, imports will slow down and with it the demand for foreign currency. The counterparteffect of over-depreciation will be a fillip to exports, thus expanding the supply of foreign currency earnings. The rupee will bounce back sooner or later to arrive at a `correct' exchange rate. Jalan appears to have veered round to this view.

He has, thus, also indicated that unlike in the past, the Reserve Bank is under no pressure to work for a strong rupee. The heavy mid-January intervenion was necessitated by the pre-election criticism of the BJP in favour of a strong rupee. BJP spokespersons no longer talk of a Rs 16 per dollar exchange rate.

But this is not all there is to Bimal Jalan's panache, which is also a resounding warning against mindless speculation. He concedes that it is not possible for any country to remain completely unaffected by developments in the international markets, particularly in East Asia and Japan. But he expects banks and other market participants to avoid ``unwarranted speculative activity'' for this can lead to self-fulfilling speculative activities in the foreignexchange markets.

Jalan is not merely talking down bear speculation. He asserts that the Reserve Bank has enough room for manoeuvre. No matter what Standard and Poor's or Moody's say, the country's foreign exchange reserves are equivalent to seven months of imports, 25 months of debt service payments and nearly six months of imports and debt service payments taken together.

The reserves position is strong, judging by accepted norms. The short point is that the rupee may depreciate as a consequence of international disturbances, but the Reserve Bank will not rush to shore it up in the short run. If push comes to a shove, the apex bank can run down reserves to meet debt obligations and cover the country's modest (1.5-2 per cent of GDP) current account deficit.

Jalan is also suggesting that the rupee should not depreciate further as of now. (Speculators beware). Thus, while reiterating that the Reserve Bank does not use short-term movements in REER as indicator of appropriateness or otherwise of exchangerate movements, he gives the following REER-based rates: base 1990-91 Rs 29.61 per US dollar, base 1993-94 Rs 41.96 per US dollar and base 1996-97 Rs 40.66 per US dollar.

The rupee - at over Rs 42 per dollar - has gone well beyond the 1993-94 REER based exchange rate. Furthermore, besides differential rates of inflation, the exchange rate is influenced also by surplus capital flows. But, as noted by Jalan, India's reserves are sufficient to take care of short-term outflows.

Jalan is not overbothered about FII outflows. He offers to let FIIs have the dollars they require from the Reserve Bank. By opening this window, FII pressure on the exchange market is being eased. Jalan also lets them take forward cover for their new equity investment. This should reassure the FIIs against losses from rupee depreciation and help new investment in equities.

Simultaneously, the forward cover taken by FIIs will provide an indication of the size and timing of probable outgo from FII disinvestment. This should removeuncertainty about FII outflows.

But opening up the market for T-bills to FIIs will raise eyebrows. Ostensibly, T-bills will enable the FIIs to park funds after disinvestment. However, since domestic short-term money rates are higher than abroad, this should lead to a surge in short-term inflows. This will expose the country to the risk of large short-term outflows.

Jalan uses his forex manoeuvrability to support buybacks of Indian paper (GDRs and ADRs) abroad. FIs can buy back their own paper or those of Indian corporates. This will clearly involve forex spend. But, if GDR prices improve in consequence, to that extent the pressure on FIIs to sell equities in the Indian market will abate.

Besides, an improvement in prices abroad will enable Indian corporates to raise GDRs on affordable terms.

Jalan woos FII investment with panache. The trouble is that India's forex problem is structural. Though imports are not large, exports are small and stagnating. Jalan addresses this problem by sharply reducinginterest rates on export credit. Together with the rupee depreciation in recent weeks (6 per cent since May 12), exports should start picking up. A wary eye will have to be kept on export growth.