Lets looks at the micro aspect and then try and judge the path of the Rupee. Starting with current account deficit, the cap has been widening each year and both components of it the trade and invisibles will remain under pressure. The trade deficit today at around $7 billion is more than double of what it was last year. Why is this so. Well it is simply because our exports are not performing upto the mark and with the Rupee depreciating, it is resulting in a rising import bill. With this year gold imports being included it will worsen the situation further if exports don’t rise. World growth is expected to fall in 1999-2000 and this will put further pressure on our trade front.

A current account deficit is in most cases is only an official source of government spending. As long as government persists in living beyond their means there is only one way that the Rupee will go.

With the RBI not allowing the Rupee to trade freely, some depreciation in our competing currencies and fall in commodities prices has only worsened the situation further. This has resulted in a fall in our export earnings. Every year we commit the same mistake of focusing more on the agricultural trade policy which is always a failure. But, finance ministers do not seem to understand. So what is the other option. None other than letting the Rupee fall.

Focus on export growth is not a very healthy option considering the fact that there is no improvement in the infrastructure front and commerce minister knowing this is setting higher and higher export targets for which the poor Rupee has to face the brunt. Imports, on the other hand, with the economy moving out of a more than a year slump will soon firm up. But what the government should look into is the rising international crude prices which will eat into the forex reserves if the Rupee is not well guarded. Real estate markets are also picking up and stockmarkets have bottomed out are clear indications that the Indian economy is on the growth path.

If these signals do indeed continue it could lead to a modest revival in economic activity which could put further pressure on the trade deficit. The invisibles account which is a strong supporter of the current account could also come under pressure. With governments over the years providing sops to IT and software sectors, exports will boom but tourism and remittances are most likely to come under pressure. Tourism has already taken a beating with South East Asian countries eating into our cake. If the government does not improve the basic infrastructure, India will lose its spot as a tourist destination.

Another disturbing factor is the rising international prices of crude. Which will not only put pressure on our oil pool deficit but will also reduce the workers remittances which will reflect in thinner inflows. All this points to a Rupee fall in the near future which is inevitable despite Yashwant Sinha trying his level best to avoid such a dicey situation. The Rupee will have to take a beating. Another serious aspect is the fallacious calculations made on the expected inflow of foreign direct investment which has nearly dried up and has experienced a continuous fall in the past three years. A sign that the Rupee will have to fall or needs to depreciate in order to attract higher inflows. And in fact foreign portfolio investment has become negative in eight of the past 12 months.

To some extent we can blame the deteriorating international appetite for risk. But, it is our half-hearted liberalisation process which is to blame.

What best method do we adopt in measuring the true value of the Rupee? Till now economists used the purchasing power parity method. Today with capital flows overtaking trade flows by more than 70 times there is a new concept called Fundamental Equilibrium Exchange Rate (FEER) .

If a country has to have a current account deficit over a long run it will have to have a trade surplus to repay its obligations. Thus, in the long run FEER is a better indicator as it is consistent with the country’s current account balance over the long term. Changes in current account balances will automatically reflect in the currency equilibrium changing. Going by the present economic outlook, it is very clear that we should expect the Rupee value to keep declining.

In India we have witnessed fiscal deficits continuously rising and there has been a qualitative decline in these deficits which is where the trouble starts. The government’s overspending is not harmful. But, if it is not productive it can lead to serious problems.

Today the fiscal deficit is in the six per cent range and with political spending on subsidies and the like it is not possible to bring down this figure in the near future. Estimates show that the public sector deficit is expected to touch nearly 10 per cent of GDP. 60 per cent of the total deficit is gobbled up by the revenue deficit. Resulting in a huge four per cent of the GDP being spent to finance unproductive government consumption. What is more worrying is the fact that capital spending has decreased in the spending programme reducing future capital productivity and cutting out our ability to repay our debts.

For this we have to run ever larger trade surpluses to repay our debts. If productivity does not rise the country has to rely on a low cost strategy to increase exports . This means that the Rupee has to be undervalued relative to its purchasing power parity value. The outcome but naturally a lower Rupee.

As India moves out of the recession the consumption potential in the economy rises which widens the investment savings cap. Today the marginal propensity to consume is around 20 per cent. Which reflects in the desire to save coming down which puts pressure on the future level of investment as savings rate declines putting pressure on the need to borrow thus inflating the current account deficit.

To protect the Rupee value and not put it under pressure, the government should reduce its consumption and try and have a smaller revenue deficit which can reflect in the true value of the Rupee along with its long term purchasing power.

So what the government has to do is not only tamper with short-term variables but have a long-term policy objective. Tampering with the nominal exchange rate will provide only a temporary reprieve. But if the fiscal disequilibrium is not corrected it will lead to an unsustainable external balance and inflation over time.

What is the role of the RBI then ? When in mid-May the Rupee touched a last 16 month low of 43. 67 against the US dollar it received wide media coverage. But, it was not an all time low. The Rs 43.70 level reached on August 20, 1998 was its all time low level.

RBI alongwith SBI play a prominent role in protecting the Rupee value. Ever since 1935 when RBI was established, maintenance of the external value of the Rupee has always remained one of RBI's main concerns. Many a times RBI has faulted on its main monetary objectives just to keep the Rupee in check.

Take the recent case. Announcing a tight monetary policy and keeping money supply in check to control inflation what did the RBI finally land up doing. RBI chose to provide price support to the dollar as this policy helped to prevent erosion of competitiveness of India’s exports while enlarging the forex reserves. But RBI does not favour an erosion in Rupee value as it affects the export competitiveness reducing forex reserves.

Despite fund flows why is the Rupee not appreciating. Thanks to RBI which is watching every move. Rise in international prices of crude and Opec reducing oil production will only further deplete forex reserves and with the US Fed announcing a hike in interest rates may work against inflow of funds from abroad. As a result,if the Rupee were to fall the RBI is well advised to keep away from supporting the Rupee.

A weak Rupee will do good in the future as exporters are crying that their competitiveness is being reduced compared to other South East Asian players because of RBI presence in having a strong Rupee. Indian industry will also benefit especially in a post- quantitative restriction regime.

It is not any particular government that one can point fingers at as to why India is in its present mess. Today we are faced with a high fiscal deficit and huge government expenditure because we have to pay for our previous mistakes.

India always took a cautious approach in most of its policy announcements resulting in many important policies getting delayed because of hot debates on the issues which resulted in precious time lost. If India has to keep to its commitments of removing all trade barriers and becoming an open market by 2005, it will have to react fast on some issues for which government will have to spend precious funds . But the issue is not that India is in the doldrums and does not have the required funds. It is only mismanagement and misuse in channelising these funds that it adding to its woes. Despite a rising fiscal deficit government does not seem to be really worried and even today procedural delays in clearing several infrastructure projects and red tapism is adding up to its expenditure.

Every year India seems to be faced with several external problems like war, famine, floods, etc., over which the government nor the central bank has any control. So looking at all these internal as well as external problems that the Indian Government is faced with it is anyone's guess that the Rupee will only go southwards in the days to come. But as to what level it will halt is anyone's guess. But if India has to compete in the world markets it will have to let the Rupee dip by at least 5-7 per cent points in a phased manner so that Indian exports become competitive and INR is in line with the Asian currencies which have recovered in value.

If India has to attain an export target of around 20 per cent it will have to give a boost to the exporter community and will have to devalue the Rupee which today is highly overvalued.