The seeds of the current situation were perhaps sown in 2009 when the Group of 20 (G20) expressed concern about global imbalances, a euphemism for Chinese surpluses, and emphasized market-determined exchange rates. The call was aimed at China, the expectation being that the yuan would appreciate if allowed to float, and help reduce Chinese external surpluses; these have come down since, despite China continuing to manage its exchange rate, engineering a gradual appreciation and significant wage increases in coastal provinces where much of export manufacturing is located.

Our policymakers, perhaps out of a colonial mindset of looking to the West for approval; or perhaps out of a conviction that a market-determined exchange rate would help us grow even faster (since markets are supposed to produce prices reflecting all fundamentals, and allocate capital efficiently); or a combination of both; responded by allowing the rate to be determined by the market.

True, the public rhetoric has remained unchanged: that we do not target a level, that the central bank intervenes only to curb volatility, etc. But there is enough empirical evidence to suggest that the policy on the ground has changed dramatically since 2009. And, unlike in the case of interest rate policy and growth, there do not seem to be any differences between Delhi and Mumbai, on this issue. Read More