If India has to attain a high GDP growth of around 8 per cent and exports of 20 per cent what should be the ideal Rupee level?
We tracked the trade flows (imports plus exports) from 1989-90 to 1998-99 and not surprisingly found a very high level of positive correlation with the county’s GDP growth. In other words, a higher level of imports and exports, did show up in a higher GDP rate.

Admittedly, this may not be the only reason. Other factors do play a role in fostering higher growth. But it is very clear that buoyant trade flows clearly is a prerequisite. And trade balance does affect the exchange rates of the country.

We feel that an exercise to define a level for the Rupee for achieving a 8 per cent on GDP and 20 per cent on exports, is incorrect. What we need to look at is the whether the monetary policy on exchange rates encourages trade flows. We do believe that for emerging markets a depreciating currency is good for its overall growth. But a runaway depreciation hurts investor confidence. After all, foreign currency flows comprise trade as well as capital flows -- both FII and FDI.

Personally, I would like to believe that a controlled depreciation -- between 4 to 5 percent annualised -- should be good enough. This would also be, to my mind, in line of the inflationary expectations in the country.

What in your opinion are the prerequisites for the Rupee to become fully convertible. And when do you think this will be possible ?
Firstly, I do not think that being convertible on the capital account is a necessity. In fact, India is to a large extent convertible. There are almost no restrictions for foreign investors and NRIs to bring in and take back their capital. The restriction is basically on resident Indians. They are not allowed as yet to hold or invest in foreign assets without approval from the RBI. This is not a hinderance on growth. I think that a call for total convertibility soon is more a fashion than a crying need.

We can look at full liberalisation once we get certain key variables right. A stable inflation (4-5%), comfortable foreign currency reserve (that covers at least a year of import requirement), steady and brisk economic growth and a healthy banking system.

If the Rupee becomes fully convertible will it devalue from the present level or will we see an upvaluation?
Its a difficult call to make. It primarily depends on the business confidence level at that point of time. An edgy sentiment will drive away money outside and weaken the currency. The reverse in case of a positive outlook.

Will euro weakening against dollar have any impact on the Rupee?
This depends on how this will impact export and imports to Euroland. An overly weak euro will restrict Indian exports to Euroland because it becomes costly for the corporates there. Usually, competitive pressures will force sharing of the depreciation. My personal feeling is that the Rupee will remain unaffected unless Euroland gets into trouble.

Should the role of the RBI be further enhanced or only restricted to the present working?
I think the RBI is playing the correct role. A role of a watchful referee (to control the fouls, read volatilities) instead of being the player itself. India still has a lot of structural problem in the banking sector and RBI would be needed to smoothen out the mismatches in the exchange and interest rates.

Today with comfortable forex reserves at $40 billion and export growth at around 11 per cent the Rupee which was stable for sometime yet saw sudden volatility. What are the main reasons?
This is because currency movements in India is controlled by the RBI. And it predominantly allows for one way movement -- southwards. Because of the skewed nature of the market which has no two way movements -- appreciation is always restricted -- the markets discount negative news a lot faster. So bunching up of payments creates spikes downwards introducing volatility.

What will be the value of the Rupee in the next six months?
It’s like predicting the rain. It rains when never expected and disappears when most needed. But, still I would look at a 2 per cent depreciation, to around 44.50.

What more is required of the present government to reduce volatility in the Indian forex markets and strengthen Rupee value?
Right now, the average volatility (around 1%) in the market is very low despite the current fall of the Rupee. So there is nothing alarming. The majors -- euro, yen, etc., -- currently trade at a 13 per cent volatility. Its best to leave the markets alone at this point of time. With the fundamentals of the economy good, the Rupee will stabilise on its own without any intervention.