This refers to the edit “Preventing volatility” (November 29). You have suggested that the advantages outweigh the disadvantages if the Reserve Bank of India (RBI) resorts to a dirty float by targeting a more predictable band around the real effective exchange rate (REER) once again. I do not know whether the central bank had ever consistently followed the REER in its exchange rate policy. The concept caught attention during the Gulf crisis and provided the rationale for the depreciation of the currency facilitating the support from the International Monetary Fund (IMF). The REER is a woolly concept despite all the literature on the subject. No advanced country refers to it now and the IMF ceased to be enthusiastic about it long ago.
The remedy of RBI intervention to arrest the depreciation of the rupee illustrates the fact that we never learn from history. Britain leaving the Exchange Rate Mechanism in 1992 after trying to defend the pound due to the massive speculation by George Soros and the East Asian Financial Crisis of 1998 spawned by the ill-advised attempt of Bank of Thailand to arrest the baht depreciation are still fresh in the memory of old timers. More recently, Japan’s interventions in the market have not helped in arresting the appreciation of the yen. Liabilities falling due for repayment within a year constitute nearly half our reserves. There is no immediate alternative to imposing administrative control on the forex market.
A Seshan, Mumbai