Rajiv Kumar has a blistering column in the Indian Express of India’s Exchange Rate taking issue with Raghuram Rajan’s recent comments that he prefers a stable, not undervalued, exchange rate for the Indian economy. Ostensibly, his comments were driven by a need to have a stable rate that advances price stability in the economy allowing individuals to makes investments as they see fit. No doubt, this also favours those vested interests, Banks, Financial institutions and other companies that have heavy foreign debt obligations. Kumar begs an answer to Rajan’s comments which he sees as counterproductive given that India’s exports have declined over the past few years. Kumar has a point, a certain decline in the Rupee will favour those SME’s that are already operating in a difficult global economy.
But the problem is this: once you start to devalue how much control will you have over the process? And even if you devalue, will Indian industry and SME’s use that to propel their exports? Answers to this question are not clear. The exchange rate, right now, is not high enough to prevent export-led growth yet Indian industry has not really responded so there is no certainty that it could happen in the near term should the Rupee slide. In this context, Rajan perhaps prefers stability over uncertainty in an international economic environment that is far from stable. But the politics of this is also interesting – Rajan’s independence and penchant for openness has already irked the government, especially Modi and Jaitley, which begs the question – Will his term be extended come 2017?