Moderate rupee rise underscored

ECONOMIC SURVEY 2003-04/ FINANCIAL SECTOR

The Economic Survey has subtly made a case for curbing a sharp appreciation of the rupee in a bid to keep exports competitive and stimulate growth.

Exchange rate management should be a combination of policy of flexibility in exchange rate together with the ability to intervene as and when necessary, it pointed out.

This is because the exchange rate management policy needs to balance build up of reserves and domestic liquidity on one hand and maintaining external competitiveness with low inflation and interest rates on the other.

The Survey has outlined that the current exchange rate policy of focusing on managing volatility with no fixed rate target while allowing the underlying demand and supply conditions to determine the exchange rate movements in an orderly way has stood the test of time.

The macroeconomic policies, according to the Survey, are important at this point of time in carefully managing the impact of potential global transition from low interest rates and currency imbalances to a more sustainable regime.

It has pitched for some moderation in the exchange rate appreciation on account of concerns about the competitiveness of exports and maintaining a stimulative macroeconomic environment.

In the last fortnight of March the rupee gained substantially against the dollar on account of large bouts of inflows followiing the capital issues of a few public sector undertakings which were lapped up by qualified institutional investors.

At that point of time, the Reserve Bank of India stayed on the sidelines of the market and refrained to intervene. Subsequently, the rupee lost its momentum against the dollar and breached the Rs 46/$ mark as there has been a slowdown in FII inflows.

Outlining the importance of prudent reserve management, the Survey is of the view that suitable policy measures to facilitate greater productive absorption of capital flows for growth promoting purposes will induce higher investments in the economy.

While the recourse to prepayment by the government as well as corporates have improved the external debt position, the debt management policy should focus on concessional and less expensive sources of funds, preferably of longer maturities.

Moreover, a constant vigil on build up of short-term debt should be kept along with focus on non-debt creating capital flows and prepayment of high cost external loans.

India's external debt stock has increased over the years to reach $112.1 billion as on December 2003.

However, the external debt indicators have shown improvement with total debt to GDP ratio improving from 28.7 per cent at the end of March 1991 to 20.2 per cent as on March 2003.