This refers to Jaimini Bhagwati and Abheek Barua's article "Yes, the rupee is overvalued" (December 19). While the econometrics in the article are reasonable, the theory underlying policy recommendations is on slippery grounds. Exchange rates overshoot for a very good reason and that reason is sticky prices. If all prices in an economy of both tradeables and non-tradeables are flexible, exchange rates will merely mirror the inflation differential. But all the prices in India, say, of cereals, aren't flexible instantly. Hence, the overshooting of exchange rates when the policy regime (here the US) changes, that is, the level adjustment (explained by Rudiger Dornbusch in 1976), cannot be ruled out. Their recommendation of manoeuvring the exchange rate so as to bring it close to equilibrium lacks the appreciation of the political economy.
Any movement in exchange rates creates winners and losers. To me, in any democracy, fixing the price of such a sensitive commodity brings the central bank in the field of picking winners. That surely isn't the job of the Reserve Bank of India.
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Any movement in exchange rates creates winners and losers. To me, in any democracy, fixing the price of such a sensitive commodity brings the central bank in the field of picking winners. That surely isn't the job of the Reserve Bank of India.
Indranil Chakraborty Mumbai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number