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Tackling the daily movement of the rupee is a task better left to Mint Road rather than North Block

You may not agree with Gujarat Chief Minister Narendra Modi on many of his views and actions that quite brazenly thrive on divisive politics and polarise the nation on communal lines. But it would be difficult to disagree with a pertinent observation he reportedly made last week on the way Finance Minister P Chidambaram has been responding to the sharp movement of the value of the rupee vis-à-vis the dollar in recent weeks.

While interacting with some leading lights of India Inc in Mumbai, Modi is reported to have questioned the logic and wisdom of the finance minister issuing statements on the fall of the rupee that had little effect on the markets. This is a question that is bothering many analysts. Granted that the media is always chasing the finance minister or mandarins in the finance ministry for a comment or two to liven up the coverage of the rupee's fall, but why should the finance ministry almost routinely issue statements aimed at soothing the volatile markets and end up exposing its failure to make a difference?
 

Remember that at Mint Road, where the headquarters of the Reserve Bank of India (RBI) is located, its governor rarely opens his mouth on such matters, despite knowing full well that he can actually make a difference to the exchange rate of the rupee through interventions. Nor does he allow his deputy governors to speak on the issue unless that is direly needed. In sharp contrast to Mint Road's reticence, North Block, headquarters of the finance ministry, goes the other extreme, often facing the charge of making statements a bit too frequently.

Consider some statements from the finance ministry in the past few weeks on the rupee that at 60 a dollar last Wednesday (June 26) had fallen almost 13 per cent in less than two months. The fall in the value of the rupee in this period was steady and was the sharpest among the currencies of most major countries. On June 6, for instance, Chidambaram said there was no need to panic over the declining value of the rupee, and the domestic currency would regain the losses suffered in the last few days and stabilise. The rupee, which was 56.85 a dollar on June 5, slipped to 56.88 on June 6 and further down to 57.06 the following day.

A week later, the finance minister made a similar statement giving the assurance that the rupee would regain the losses suffered in the last few days. But the rupee continued its downslide and by June 21, reached 59.27 a dollar. The finance minister's comment then changed somewhat and attributed the fall to global developments. He also added that the RBI would do whatever was needed to stem the fall. Less than a week later, the rupee had crossed the 60-mark and was threatening to touch 61.

Since then, the Indian currency has recovered a bit, but Chidambaram's frequent statements have ignited a debate on whether he should have been so generous with his observations on the movement in the rupee's value. Even Economic Affairs Secretary Arvind Mayaram said on June 25 that there was no need for any panic, and the government did not believe in taking any knee-jerk decisions. The following day, the rupee touched 60 a dollar.

Should the finance minister be seen making statements on the rupee's movement, or for that matter, on how the RBI would take the required steps to stem the fall in the currency's value? A government that believes in reforms and the markets should ideally stay away from commenting on daily movements in the rupee or the stock market indices. There is little that the government or the finance ministry can do to influence the rupee's value in the short term. If anything is likely to work, it is the RBI's dollar power, with which it can intervene in the market and provide some support to the value of the rupee against the greenback.

Indeed, it is not just with increased dollar supplies in the market that the RBI can stem the fall in the Indian currency's value. There are other methods, too, such as the one it employed last week. Instead of releasing the balance of payments data for the January-March 2013 quarter on June 28, as originally scheduled, it chose to make that public a day earlier on the morning of June 27. An improvement in the current account balance numbers for that quarter was anticipated, and the RBI decided to advance its release in an apparent bid to soothe the rupee sentiments in the foreign exchange market. And that strategy seemed to have worked since the rupee's downward slide below 60 was arrested.

It is time North Block realised the role it ought to be playing. If it is worried about the value of the rupee, it needs to fix the many weaknesses in the government's policies that have retarded the flow of investment, including that from foreign companies in projects. Tackling the daily movement in the value of the rupee is a task better left to Mint Road.