Free Fall, Fiscal Fix

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>There's a single message for those looking at the rupee's value: maybe further intervention by the Reserve Bank of India (RBI) is a bad idea. First off, we do not have the kind of reserves needed to protect the rupee's value. On a fundamental and structural basis, the rupee's value is quite representative of its current value against the dollar.<br><br>Granted, the ‘fundamental' value is also being driven by events outside the government's or RBI's control (our economic fundamentals — the current account and fiscal deficits, and high, persistent inflation — are factored in). So is there anything else the government can do?<br><br>Apart from gold imports — which are essentially unproductive assets — the trade balance is more or less stable, if high. There's higher customs duty on gold; and while that may dampen consumption, raiding it further will only increase illegal channels. Perhaps a quantitative cap might work better.<br><br>Structural policy changes that boost exports — changes in certain sectoral policies and rules for special economic zones — might also help. But such changes will take time and will not bridge the savings-investment gap (that is currently being filled by foreign inflows like FCCBs and ECBs) quickly. <br><br>Firms, government and ordinary folk have grown obese by ‘gorging' on foreign money (just look at the stock market, for instance). Perhaps it's now time to go on a crash diet (pun not intended). For a start, policymakers in government and the central bank must clearly state that intervention will stop, and the markets will decide the value of the rupee.<br><br>Some RBI officials have begun to send out that message. It is time the finance ministry&nbsp; followed suit. The only way is to get fiscally fit.<br><br>(This story was published in Businessworld Issue Dated 28-05-2012)</p>