Silly Persons Holding Silly Views
In an interview given to Tamal Bandyopadhyay (Business Standard,August 28), the governor of RBI describes the view that the bank has nothing left in its arsenal with which to protect the rupee as a silly view. As I happen to hold that view, I must consider myself a silly person. It is a sad fall from grace but one that I hope I shall survive, at least so long as A V Rajwade (BS, August 28) continues to praise my comments! But before the general reader makes up his mind on the merits of the different views, let us understand what the argument is about. The governor believes that he has adequate reserves to protect the exchange rate from untoward movements; that is to say that the RBI will buy dollars with rupees when there is a surge in supply of dollars and sells dollars for rupees when there is excess demand for them. The relationship is asymmetric since, within bounds, the RBI has an unlimited amount of rupees to buy dollars but it has only a limited amount of dollars to sell. One way of countering a downward move of the rupee is to allow the exchange rate to depreciate; but that would not defend the value of the rupee. The governor opposes such a policy because the foreign exchange market is