More transparency, currency trading data needed

Excerpts from What's Hot on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

The rupee has shot up by 1.5% today and by 5.25% in the past month. Most dealers attribute this meteoric rise to the RBI, which has been intervening less than it normally does in the forex market, probably because today inflation is a bigger concern than any other. So, was the RBI wrong in intervening in 2006 and is it right in letting the exchange rate to find its own level now? Or will a strong rupee also hurt growth as much as inflation? Discussing this are Professor at IGIDR, Dr Ajay Shah and Dr Ajit Ranade, chief economist with the AV Birla Group.

Excerpts from an interview given to CNBC-TV18

Q: You have espoused the cause of the rupee finding its own level and even found fault with the RBI for intervening and injecting a huge amount of liquidity into the system. Today, would you say that RBI's stance is right that it should stop intervening altogether?

Shah: Yes I think we are moving on the right track. When the central bank is more focused on inflation and less focused on the currency, that is a good idea and I would applaud that. I would argue that we need to do a couple of more things. The first is we need a lot more central bank transparency and they should be giving us data everyday, about what currency trading they are doing. Secondly, it is useful and important for all exporters and importers to have access to a currency futures markets, so that people can do their own risk management.

Q: We already have a slew of software and textile exporters saying that they want to shift out of India because it's becoming too expensive to import with rising currency. Now, if the currency were completely let loose, the current account deficit in the first nine months was 11 billion dollars but the capital flows were 27 billion dollars, so if you let it float, then the current account deficit would logically have to expand to accommodate the entire capital flows - which means the deficit could be 3%-4% of the GDP, do you think that's the way to go?

Ranade: If one looks at the macro-economic fundamentals, we expected the currency to actually depreciate, not appreciate - whether it is a fiscal deficit, whether it is a current account deficit, whether it is an inflationary situation in India and a variety of other factors. But the fact that the currency is strengthening because of the flows - and I don't remember the rupee appreciating by 10% in 12 months - so this is just unprecedented and exporters are hurting like anything. One must remember that exports are employment intensive and it's not imports. I am not sure that using the currency to fight inflation is a good idea by non-intervention, as Ajay mentioned.

Q: If you looked at the fundamentals then the current account deficit indicates that the rupee should actually depreciate, but if the currency appreciates in the manner in which it is appreciating and given the capital flows, then would not imports become so cheap. For eg. if the dollar were at 30 or 25, wouldn't imports become so cheap that there could be domestic de-industrialization?

Shah: I do not speculate on what will happen to the currency, the currency is a price. It's like  asking me, will Nifty go up or down? When you look at all the mature market economies, it is a perfectly normal part of capitalism, that currencies fluctuate. But what central banks can be useful in doing is, in delivering low and predictable inflation, and it is too high a cost for the country if the central bank loses its focus on inflation and goes of chasing other targets.

Q: If we look at countries, we should be compared with - China for eg, their reserves are one trillion and they are still going with a depreciated currency and they have not allowed their currency to appreciate despite the fact that in that country, trade deficit itself is in a surplus and the current account itself is in a surplus?

Shah: China is a singularly immature market economy and they don't have a financial system to speak off. They have horribly broken banks and they have many problems. India is actually a much more normal piece of capitalism when compared with China, and so I think you should look at every other country in the world but not China when you are trying to understand these questions.

RUPEE RALLY

- At near nine-year high - Rally on since March 16 - Level not seen since June 1998 - Has jumped over 5% in the last month - Rupee appreciates more than Asian rivals in 2007 - Rupee appreciated less than rival Asian currencies in 2006

Q: Your response to the same question, do you think if the rupee where led to float and if the current account deficit would expand, do you think there could be greater financial chaos?

Ranade: One of the big drivers of India's growth today is exports and not exports minus imports but exports. Exports are employment intensive. It is one thing to say that China doesn't have a proper financial system but China has delivered sustained high growth and high employment for a long time and so we cannot completely discount China's growth strategy.

Secondly, China has kept its currency undervalued for quite some time and we are not espousing that it will be undervalued but lets decide on a fair value and lets keep it relatively stable and we are not saying it should be completely rock solid.

One must remember that the dollar is a foreign currency to all other nations, except the US and that is why, we have got to worry about managing the currency.

It is difficult to manage currency and interest rates together and also difficult to look at inflation and currency together, but 10% appreciation in one year is totally unprecedented and even the import duties have come down to 7.5%, the peak rates are at 7.5%. So, this is like a double whammy to domestic positions.