It is official now. The government had maintained for weeks that the fairly steep fall in the rupee's value was a natural and overdue correction for a currency that had been overvalued for some months. The RBI has now implicitly acknowledged that, in the current skittish state of capital markets, it is hard to say when a correction might turn to runaway speculation. In normal circumstances, the government would be wrong to second - guess the rupee's correct value. This it has acknowledged by refusing to say that Rs 40 to the dollar was about its right value, especially as the dizzy fall in other Asian currencies was revising daily the level at which the rupee might remain competitive. But these are far from normal circumstances, and the RBI was probably right to act now.Of course, there is no guarantee at all that Friday's package -- including a raising of the bank rate which will raise interest rates all round and squeeze liquidity from the market -- will have the desired effect of halting the slide. The
rupee could, as likely as not, fall victim to the next shudder in Asian markets. World capital markets are hardly in a rational mood, with far sounder economies falling victim to their excesses. But for now, the government seems to have done what it can. Rationally, India is not too badly placed just at the moment. Compared to the South-East Asian economies, indeed even in absolute terms, it has a modest current-account deficit of about 1.5 per cent. It has the advantage of tighter capital controls and the flexibility to tighten them still further if warranted.
The central bank's present intervention could plausibly boost this advantage, although only the foolhardy would wager a bet on such a thing in the present climate. But the RBI's action has its obvious downside. At a time of near-recession in manufacturing, raising interest rates might -- just -- protect India from the Asian contagion. But it will do the economy not much good. Yet that is a risk the country will have to live with, for now. The RBI hasthe thoroughly unenviable task of walking a tightrope to keep the rupee invulnerable as far as possible and not sending the country headlong into recession. The only thing that can be said with certainty about Friday's package is that it must be a strictly temporary one and not last a day longer than necessary. Even so the RBI and, indeed, the government are right not to make definite statements to this effect, retaining their flexibility of action and trying to defeat would-be speculators at their own game by keeping them guessing.
It just applied this strategy, with the government refusing stoutly to put a definite value on the rupee and the RBI stepping in with its package at the time the rupee looked most vulnerable. More positive and beneficial activism could come from government itself to boost confidence, with a renewed emphasis on reform and the newly instituted second committee on banking reform going to work quickly. In a crisis to which India seemed immune until just weeks ago, the government andthe RBI seem to have played their cards right so far -- insofar as anyone knows what the right thing is. Here is hoping that they are not tested more severely.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
