Article;
Politicians make symbolic statements on rupee in the run up to the polls which will subside after May 16.
Comment;
Basically the economy is concerned with employment and job
creation that is why policymakers choose depreciation over appreciation. We
should follow real-effective-exchange-rate which also has a large element of
inflation which when inflation will go down REER will automatically go down... Inflation
is responsible for a depreciating a currency... Lowering inflation is another
way of making your exports competitive... it is called internal devaluation... Therefore
we do not need to depreciate currency necessarily... lower price level will
make the economy competitive... Basically there is not much flaw in the
argument and depends on trade-offs...
I made a mistake. I confused REER with nominal exchange
rate…
Sorry! REER is already inflation adjusted but people are
more concerned with nominal exchange rate which (this one!) has a large element
of inflation, REER is equal to nominal exchange rate minus inflation which will
go down with inflation, but, exports will become competitive because general
price level has gone down and the Indian currency has become strong in REER
terms. The prices of goods and services decreases relative to the quantity of
money... It is a gain in terms of income; real income has gone up... There is a
trade-off between how much nominal exchange rate has appreciated and how much
price-level has gone down... If the currency has not appreciated in the nominal
terms and price-level has gone down that is good for exports, they will become
competitive, lower prices will increase demand for our exports... Precisely
this is called "internal-devaluation". Employment grows with internal-devaluation,
too... It will also create jobs in the export sector... Therefore the RBI
should try to achieve/target/maintain REER while at the same time it should try
to reduce inflation at home… This is another way of making exports competitive…
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