With India’s economy fairly politically stable and growth performance notching up with trade on both exports and imports improving, still the Rupee seems to be stuck in the Rs 43 range and has remained static for couple of months now. Why is this so? There has to be some amount of movement in the value of the Rupee and since this is not happening traders, businessmen and operators are worried about the Rupee being range struck. It is like the silence before a storm that is building up expectations which only results in wide fluctuations which distorts the smooth working of the forex market.

In past times value of the Rupee was a guarded secret and was highly politicised. In fact, the prestige of the country was at stake if government took a decision to devalue the currency. When Indira Gandhi had wanted to devalue the Rupee it became a national debate and many thought that India was reeling under American pressure and wanted a sell out of the country. Soon the government put the Rupee on auto pilot and linked it to a basket of currencies so that a appropriate level could be established with consultations with the RBI and the government officials. It was only in 1992-93 that the Rupee became market determined moving by forces of demand and supply.

Today with India getting integrated with the world economy it is very difficult to conclude as to whether a strong INR is good or a weak INR is preferred. It does not mean that when the Rupee is weak there has been a failure in policy. Japan sustained its export performance for more than two decades by keeping its yen weak.

Many a times it is the selfish attitude of the governments that makes them keep the value of the currency strong. A look at India's Rupee movement will show that in 1989 the Rupee value was Rs 14 to a dollar and today in 1999 it stands at a low of Rs 43 -- a steeper fall than most of the South East Asian economies barring Indonesia.

It was in 1994-95 when convertibility came in the officials and markets have determined the value of the Rupee which has had several roller coaster rides. It was fairly stable at Rs 31.37 against the USD for more than an extended period of 29 months -- March 1993 to August 1995. Then in the second half of 1995-96 it declined to Rs 33. 40 and then to Rs 42 in 1998-99 and now to a little below Rs 44 in 1999-2000.

Over a four year period of 1995-99 the decline has been over 30 per cent in nominal terms that works out to a high average of 7. 5 per cent per annum.

Although the Indian economy excluding last two years has had a fairly stable growth rate, it is the external influences that have reflected in the Rupee weakening in value. Firstly, the South East Asian currency crises in which recessionary growth in these economies influenced world currency movements and then the Pokhran blasts which saw the US imposing sanctions which played heavily on the Rupee value.

Expectations that India will once again go into a debt crisis saw the Rupee dipping to new lows. But despite the Rupee falling there seems to be no major concern and no heads seem to be reeling. Thanks to the guardian angel, RBI, which has always extended a helping hand and its time to time interventions and dialogue with father SBI, will take all possible preventive measures in deferring a fall.

Thus, even today if Indian markets are so called open yet it is the RBI which holds all the reins and autonomy and is the only source which knows where the Rupee will head and where it will rest. What will be the future rate? Mid-May saw the Rupee coming under tremendous pressure hitting a lifetime low of below Rs 44 against the dollar. But, RBI was quick in its actions and sold dollars heavily in the market and brought the Rupee back to the existing level of Rs 43.65 against the dollar.

In the current financial year the rate of decline of the Rupee since April 1999 to date has been a little lower than the trend rate of six per cent per annum. But these are statistical illusions as comparisons are on nominal rates and not real rates.

Businessmen look at the nominal rates for comparisons. But, inflation which is pepping up should also be accounted for as economists argue for the real rates to get a better world comparison. This is what is referred to as the real effective exchange rate (REER) which the RBI considers while taking decisions.

But latest government thinking is on having a tight monetary policy and using of the end use criteria technique in improving India's Balance of Payments (BoP) situation. Exporters took maximum advantage in covering their positions when the Rupee hit a low of 44. 05. But RBI was quick in its action and realised that the exporter community will take full advantage and will not bring back their proceeds parked abroad. Therefore, with the help of SBI heavily sold dollars in the market.

Exporters feel that the Rupee at the present level of Rs 43 is undervalued and should be around Rs 45 if India wants to be externally competitive especially at a time when most of the South East Asian currencies have improved their currency values. But it is not necessary that a strong currency will improve the BoP situation of the country and a weak currency deteriorate it.

In the 80s when the Rupee was devalued, the country’s BoP worsened. But in the 90s when the INR appreciated in nominal terms, the BoP consolidated with reserves moving up but debt remained the same.

For a country to improve its BoP it is not only currency values but a number of other factors that also play a major role. Competitiveness of country, foreign demand and performance of the domestic industry all play an influencing role.

Continuous currency appreciation in the long run is unsustainable and will not be a very effective variable in improving a countries BoP position. In fact, it may make matters worse by resulting in external debt mounting.

Today India has an external debt of around $99 billion which is adding to the financial chaos in the country. In such cases, to improve a country’s position does one devalue or revalue its currency ?

The Indian economy is on a high growth trajectory and capital inflows are on the rise. A comparison of the exchange rate with the CPI rather than the WPI will show that the Rupee has strengthened in real terms by nearly six per cent. Something for RBI to act fast on. But the whole issue lies in how the RBI views the matter and also on how it reacts to influence of capital inflows. What are the major factors influencing capital flows and what is the desired level of such flows?

Today with the Indian economy getting influenced by the world economy, it is the US markets that play a major influence. If the Fed adopts a tight monetary policy to control inflation it is most likely that the US stockmarkets will crash. This will result in all world stock indices nosediving. Take the recent crash in Nasdaq that saw turmoil in world financial and stockmarkets with blue chip companies hitting major lows. Technology stocks are hit the worst which result in American Depository Issues (ADR) of IT stocks coming down affecting capital inflows.

Well lets not forget it is the political situation within a country that has a major influence on the currency value. If all goes well with Pakistan -- which at present seems most unlikely -- the Rupee can remain static. But, if things deteriorate RBI will have to decide what to do otherwise the Rupee will have a major fall if not controlled at the right time.

Again the US has been cautioning India about its high fiscal deficit. But if once again Yashwant Sinha takes on a high taxation regime to curtail deficit and bring in more revenues through the taxation route, it will be the foreign institutional investors that will take the first exit hampering capital inflows . This will automatically result in markets itself bringing down the Rupee value which will be detrimental at the moment.

But BJP is determined and has announced that it will not let the Rupee dip and that it will stick to its Swaraj raj. But the million dollar question is at what cost and from what source will they protect the Rupee value. Looking at the above, it is likely that RBI will follow the path of the government and will not refrain from the set policies which means that Rupee will not fall from present levels.

Today there is a lot of controversy about the role of the central bank in the smooth working of the forex markets. Many investment bankers and economists are of the view that looking at the present functioning of the economy it is but natural that the Rupee is being kept overvalued and that the RBI does not want the unit to fall further. But is this approach realistic.

Today India is comfortable with high foreign exchange reserves which the RBI can afford to meddle with. But what about the future in case exports do not perform and capital flows which today are dismal become negative in the future and there is a outflow of funds which will put pressure on the forex reserves. In such a situation What does the RBI do.

Well many a times it is quite contradictory to its announcements that the central bank has reacted. Many a times to save the Rupee value it has purchased dollars realising liquid money in the economy despite announcing a tight monetary policy.

So it is only the RBI that is aware as to what Rupee level is most comfortable for the economy.