The Telegraph
Since 1st March, 1999
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Govt grapples with rupee riddle

New Delhi, Feb. 16: The government is a divided house on the course of the rupee. A section within the government feels that the steady appreciation in rupee should immediately be checked as it is hurting exports and has failed to curb inflation. Another lobby, however, believes that the currency should be allowed to rule strong as it lowers inflation and keeps the oil bill within a manageable limit.

The finance and petroleum ministries want a stronger rupee on the back of increased net foreign inflows, but the RBI favours a check on appreciation to step up exports.

The trade lobby, backed by the commerce ministry, would also like to see the rupee depreciate by 2-3 per cent, which would pep up exports.

The rupee yesterday closed at 44.10 to the dollar, near the previous day’s close of 44.13. Over the last few months, strong forex inflows have buoyed the rupee, as foreign investors pump in funds into the country encouraged by improved sovereign ratings, the boom on the bourses and higher interest rates.

Top officials said the North Block supports a stronger rupee since it clamps down on prices. Finance ministry mandarins feel that any move to depreciate the rupee by buying dollars will only have the effect of ramping up money supply in an economy that is flush with liquidity.

However, the RBI has almost convinced the finance ministry to follow a policy of soft intervention in the money market along with sterilising inflows. “The whole aim now is not to depreciate the currency but to contain excess appreciation,” officials said.

“We want the market to find its own levels but too sharp an appreciation is not something we are comfortable with ... the rupee has appreciated by nearly 6 per cent in the last six months,” they said. The government or the RBI intervenes in the foreign exchange market through state run banks.

Yesterday, forex dealers perceived a significant government intervention that steadied the rupee and checked its appreciation.

North Block officials said it has been brought to their notice that exports have suffered from the overvaluation of the rupee by 8-10 per cent vis-à-vis other currencies.

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