Sunday, July 11, 2010

Do you have the facts, Mr. Rajwade?

Mr. A.V. Rajwade is at it again. In his column, he argues that India’s exchange rate policy is braver than China’s while China’s policy is wiser. Whether a weak currency policy is wisdom or not is another matter altogether and having written about it enough, I’ll restrict this post to the facts and not opinion.

Mr. Rajwade says that India’s braver(and he doesn’t mean it as a compliment) because it allowed the exchange rate to appreciate by 6.5% in April 2007 and also when we allowed the rupee to appreciate 12% in “real terms”. The “real terms” he speaks about relies, no doubt, on REER. But leaving that aside as well, lets look at slightly long term data and not isolated instances of INR appreciation only.

In July 2008 China pegged its Yuan(CNY) to the US Dollar(INR) and ended this peg on June 21. 2010. Since India’s exchange rate was flexible through this period it would make a lot of sense to look at movement over this period and not just at intermittent movements within. On July 1 2008, the CNY traded at 6.8608 and the Indian Rupee (INR) at 43.23. On July 1 2010, they traded at 6.7810 & 46.65 respectively. Over this period of time the CNY appreciated by 1.16% whereas the INR depreciated by 7.91%.

Looking at these numbers over a longer period of time and specifically addressing the 2007 INR appreciation, on July 1 2005, the CNY traded at 8.2765 and the INR at 43.45. Given the 2010 traded rates above, over the last 5 years the CNY appreciated by 18.06% and the INR depreciated by 7.36%.

Bravery & wisdom are subjective judgments, but lets at least get the facts right.

Another rate hike, another missed opportunity

On a totally different note, when the RBI increased its Repo and Reverse Repo rates by 0.25% last Friday, it missed another opportunity to reduce what it calls the LAF “corridor”. With the Reverse Repo rate at 4.00%, a gap of 1.50% between it and the Repo rate isn’t a corridor. Its an expressway. It allows the RBI to conduct monetary policy in an underhanded manner like it did last month.

When liquidity tightened due to the 3G and Broadband spectrum payments, the overnight rate moved from the Reverse Repo rate of 3.75% to the Repo rate of 5.25% without any explicit monetary policy action or guidance.

So much for transparency…

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