Sunday, July 23, 2006

Indian Council For Research On International Economic Relations: "Rupee to USD is highly managed"

According to the Indian Council for Research on International Economic Relations in a 2003 working paper, the Rupee is essentially pegged to the US Dollar. They describe it as a "highly managed" currency that is subject to intervention by the Reserve Bank of India (RBI).

According to the paper "India has been in a homogeneous regime of low exchange rate flexibility from 1979 onwards."

American economists have long said that India manipulates its currency to one degree or another, however Indian economists appear to say the same thing. Given that there is no dispute regarding the artificially low value of the Indian Rupee - as the Indian economy has grown double digit percentage points while the Rupee remains flat - we should demand one of two things immediately:

The President of the United States should demand that India stop manipulating their currency. Action will be seen in a rapid rise in the regime once it is freely traded. If India does not stop their unfair currency practices, resulting in the loss of American high tech jobs, we should impose a temporary duty of 35% that increases at the rate of economic growth of the Indian economy - until such time that India stops manipulating their currency.

According to many IT trade magazines the savings gained by sending software development to India is around 20-30%. A fair trading regime would balance the playing field and the best company would get the business - not the company most able to exploit an unfair currency regime.

The United States' lack of intervention in this clearly unfair relationship is causing millions of high-value jobs to be be created offshore. President Bush should not allow India to continue this unfair manipulation of the Rupee; to do so expedites the offshoring of American jobs.

If you believe in free trade, you should also believe in fair trade. Manipulating a currency is no different than dumping and is an unfair trading relationship by definition. Is it too much to ask that our trading partners play by the rules? And if they don't play by the rules, is it too much to ask that our own government intervene on our behalf?

5 Comments:

At 11:08 AM, Blogger Prasanth said...

Hi,

Indian government has been pegging the Rupee to the Dollar as long as I can remember. In 1990's when the "official exchange rate" was around 30 rupees to a dollar, you could get nearly 50 rupees for a dollar in the black market. So you can say that government was actually "appreciating" the rupee against the dollar. Current official exchange rate is around 47 Rupees to a dollar and it is almost the same give or take a rupee in the "black market" so you can say that the current rupee to dollar exchange rate is more or less market defined rate.

Remember that in India, Rupee is fully convertible as far as companies are concerned but not for individuals. What this means is that Companies are free to convert their Rupee holdings into USD or vice versa but individuals cannot convert their Rupee holdings to USD.

The government is seriously thinking of stopping the peg against the dollar and allowing Rupee to "float" freely and allow full convertibility but the Communist party which supports the current government from "outside" is vehemently against it (as commies are bound to do – after all they are against all kind of progress).

Bear in mind that the effect of "free floating" the Rupee will have opposite effect of what will happen if Chinese do the same with their currency. If Indian government allows free float of the Rupee, Rupee will further depreciate (my guess is that the exchange rate will be something like 50 Rupees to a Dollar) which is not something US will wish to see and may be that is why US government is keeping mum about Indian Rupee when they are persuading China to allow their currency to "float".

BTW, in the last 2 months, Rupee has depreciated by about 2 rupees (from 45 to 47 against the dollar).

Regards,

Prasanth

 
At 3:13 PM, Blogger Prasanth said...

Hi,

Indian government has been pegging the Rupee to the Dollar as long as I can remember. In 1990's when the "official exchange rate" was around 30 rupees to a dollar, you could get nearly 50 rupees for a dollar in the black market. So you can say that government was actually "appreciating" the rupee against the dollar. Current official exchange rate is around 47 Rupees to a dollar and it is almost the same give or take a rupee in the "black market" so you can say that the current rupee to dollar exchange rate is more or less market defined rate.

Remember that in India, Rupee is fully convertible as far as companies are concerned but not for individuals. What this means is that Companies are free to convert their Rupee holdings into USD or vice versa but individuals cannot convert their Rupee holdings to USD.

The government is seriously thinking of stopping the peg against the dollar and allowing Rupee to "float" freely and allow full convertibility but the Communist party which supports the current government from "outside" is vehemently against it (as commies are bound to do – after all they are against all kind of progress).

Bear in mind that the effect of "free floating" the Rupee will have opposite effect of what will happen if Chinese do the same with their currency. If Indian government allows free float of the Rupee, Rupee will further depreciate (my guess is that the exchange rate will be something like 50 Rupees to a Dollar) which is not something US will wish to see and may be that is why US government is keeping mum about Indian Rupee when they are persuading China to allow their currency to "float".

BTW, in the last 2 months, Rupee has depreciated by about 2 rupees (from 45 to 47 against the dollar).

Regards,

Prasanth

 
At 3:15 PM, Blogger Prasanth said...

Oops !! Sorry. Looks like i posted my comments twice.

 
At 7:36 PM, Blogger R. Lawson said...

"The government is seriously thinking of stopping the peg against the dollar and allowing Rupee to "float" freely and allow full convertibility "

That would be a positive move.

"but the Communist party which supports the current government from "outside" is vehemently against it (as commies are bound to do – after all they are against all kind of progress)."

They have something in common with another group of Communists - in China.

Freely floating the currency would be a major step in leveling the playing field. It would also stem many of the calls from protectionism.

I believe the goal should be liberal trade with India, but not until we have a more level playing field. Floating the currency takes a ton of wind out of our sails when it comes to critiquing India - and rightfully so.

It would be a huge move in the right direction. I hope they do the right thing. Thanks for your posts.

 
At 8:07 AM, Anonymous Anonymous said...

Read this highly interesting article:

Indian Rupee should go back to Rs 45/USD
http://diggindianews.com/IndiaNewsPolitics/Indian_Rupee_should_go_back_to_Rs_45USD/

 

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