Abheek Barua: Does the rupee need more appreciation?

The recent surge in inflation has revived the debate on whether the exchange rate should be used more effectively in managing "imported" price pressures. Those against the idea of appreciation have argued that the impact of appreciation is somewhat minuscule on inflation and the cost in terms of export losses could be significant. Some of my fellow columnists in this paper have referred to rigorous analysis based on cross-country data, which point to the inefficacy of exchange rates in denting inflation. Those in favour have portrayed it as some sort of a magic cure that the RBI, mired in dogma, chooses to ignore.

It is important in this situation to get handle on the facts. First, the RBI has quite actively explored the exchange rate option in addressing global commodity price pressures. The rupee is today trading at a level of roughly 40 to the dollar compared to a high of 46.80 in July 2006