ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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External Sector, Growth and the Exchange Rate

India has to acknowledge that it needs to manage the exchange rate rather than claim it should be market-determined. The rupee remains overvalued. To avoid a balance-of-payments crisis caused by the large current account deficit what is needed is depreciation of the rupee to somewhere around Rs 70+ level and the adoption of tight, defl ationary monetary and fiscal policies which would be extremely bitter.

1 Background

Over the month of June, as foreign institutional investors repatriated $7 billion (bn) of investments from the debt and equity markets, the rupee fell from 56.50 a dollar at the beginning of the month to a low of almost 60.75. At the time of writing (on 4 July), it was trading slightly above Rs 60. This article discusses how vulnerable India’s external sector is and the prospects for the exchange rate.

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