On July 13, the gold and foreign exchange reserves amounted to $219 billion — $57 billion over the figure a year ago, $42 billion of which accumulated during the current calendar year. They have been rising for so long that it would be most boring, except for the fact that the Reserve Bank of India got tired and tried to stem the rise. It began to appreciate the rupee. In the year ending July 13, the rupee had appreciated 14 per cent against the US dollar and 6 per cent against the euro; these are appreciable accretions. The RBI would like to pretend that the exchange rates are determined by the market and it has nothing to do with them. But when it enters the market and mops up billions of dollars, it can hardly claim to be an idle bystander. But it did try that stance; it did not touch a single dollar between July and October last year. In those months of abstinence, the rupee appreciated 3 per cent in terms of the dollar. Most of the appreciation occurred early this year, when the RBI was madly buying dollars.

Thus, the appreciation was not a sudden or radical break in policy. There are powerful industrial interests that abhor rupee appreciation. Exporters dislike it because it reduces their earnings, domestic producers because it makes competing imported goods cheaper. So the RBI would like to ban appreciation. But, at times, it would have to buy so much foreign exchange that it would lose control of domestic money supply, which increases with every purchase of exchange. So at least, in its own view, the RBI is doing a balancing act — weighing changes in the exchange rate against changes in money supply.

The recent acceleration of its dollar purchases suggests that this game is getting more difficult — that capital inflows are rising and putting more pressure on the exchange rate. If so, the government should be doing some long-term thinking: which is in the country’s better interests? In this respect, one has to admire China’s single-mindedness; it has kept its exchange rate constant for years. It has not baulked at the required rise in reserves and money supply. As a result, its corporations have had abundant liquidity, and it has achieved amazing growth. India’s indecisive policy has only damaged its performance. Does this mean that we should keep the rupee down and let money supply rip? That would be worth doing only if we are prepared to draw the implications and bring down interest rates, if necessary to zero. Middle-class savers would not like it; and there are many of those in governments. There is a conflict between their interests and national interest that the government needs to confront. If it does not want to do so, it must appreciate the rupee so that we can have cheaper imports.