Advice and Dissent: My Life in Public Service by Y.V. Reddy

Author:Y.V. Reddy [Reddy, Y.V.]
Language: eng
Format: epub
Tags: null
Publisher: HarperCollins Publishers India
Published: 2017-06-26T18:30:00+00:00

21

THE PROBLEM OF THE RUPEE

DR BHIMRAO AMBEDKAR WROTE A SCHOLARLY BOOK TITLED THE Problem of the Rupee: Its Origin and Its Solution.1 He started his career as an economist and he made a name for himself as a monetary economist. Dr Ambedkar wrote this book in 1923 (and updated it in 1947). He gave a memorandum to the Hilton Young Commission (Royal Commission on Indian Currency and Finance) in 1925 on the exchange rate of the rupee. At that time, the Indian national opinion and business in India were almost unanimous in favour of a depreciated rupee as an instrument for our growth. The government had a different view which provided incentives to British exporters. Ambedkar is reported to have said in his statement before the commission: ‘At the outset, it is necessary to realise that this controversy involves two distinct questions: (i) should we stabilise our exchange? and (ii) what should be the ratio at which we should stabilise?’2 The two distinct questions raised by Ambedkar continue to be relevant even today.

‘I do not know,’ was my answer to a question on my opinion as governor on the prevailing exchange rate of the rupee. There was a follow-up question: ‘How can the governor intervene in forex markets to influence the market-related exchange rate without knowing what is the right value?’ I responded: ‘I cannot define God. I can recognise the devil. We can see excess volatility or an out-of-alignment rate of exchange when we see it happening.’ That summed up our view on management of the exchange rate.

‘Venu, you should get some respect for our rupee. I have to pay forty rupees to buy a dollar; rupee is shamefully weak,’ one of my friends advised me. I told him, ‘The Japanese have to pay double that amount of their currency, yen, to buy a dollar; and surely, Japan is not weak.’

He retorted, ‘The yen is a strong currency as it has appreciated in the past compared to the US dollar.’ I asked him, ‘Does it become a strong currency for appreciating in the past or for expected appreciation in future, based on the past?’ I added that sometimes, the rupee depreciated vis-à-vis the US dollar, but most other currencies also depreciated similarly. That might reflect strengthening of the dollar in general, rather than weakening of the rupee in particular. My friend got bored with the conversation. Many of us feel that we are patriotic if we advocate a strong rupee, but strong in what way? More important, who determines the exchange rate? How does it come about?

The exchange rate is also a price. The difference is that in goods and services, the exchange takes place between a currency and a good or service. In the case of exchange rate, the exchange is between two currencies.3 When the exchange rate is left to forces of demand and supply in the market, it is treated as flexible exchange rate. If, on the other hand, the government decides the price, then the

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