The Government of India, Ministry of Finance and the Reserve Bank of India, the country’s central bank, have been confronted by the challenge of surging capital inflows over the past five years.
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Crawford Bayley & Co
Until early 2007 the Reserve Bank of India had managed to insulate its hugely successful exchange rate policy from these surging capital inflows. But then things seemed to fall apart as the rupee-to-US$ rate appreciated from around 44:1 to 40:1 and there were corresponding changes in various real effective exchange rate indices.
The predicted costs of this avoidable appreciation are now showing up in a marked slowdown in exports of goods and services, sudden pressure from cheap imports on import-substituting activities, rising job losses in labour-using industries like textiles, sharply mounting trade deficits and massive problems of liquidity management.
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Sanjay Asher is a partner with Crawford Bayley & Co. Bhumika Batra is an associate.
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Email: sanjay.asher@crawfordbayley.com
