Too sensational: The defence of the rupee

                                       Miss Prism: Cecily, you will

read your Political Economy

in my absence. The

chapter on the

Fall of the Rupee

you may omit.

It is somewhat too sensational.

-- Oscar Wilde,

The Importance of Being Earnest,

1895.

The graph above superposes the INR/USD exchange rate and Nifty, both reindexed to start at 100 on 15 May 2013. The graph runs till 21 August (i.e. yesterday). The rupee has depreciated by 17% and Nifty has dropped by 13.7%. I feel that the drop in Nifty is substantially about the reversal of reforms of this period. On the exchange rate, I think every short seller of the world got attracted watching the government trying to defend the rupee, which has given overshooting. This problem was exacerbated because RBI had damaged the liquidity of the currency market; when a flood of orders came, the price moved more because the market was shallow.

Here's a kit of readings. By now, almost everyone thinks that the Strong Rupee Policy was a mistake. It's interesting watching people switch positions through this time-line.

• Why did we bumble on the defence of the rupee?, Economic Times, 21 August.


• Crisis and complicity, Pratap Bhanu Mehta in the Indian Express, 21 August.


• A deadly defence, Surjit Bhalla in the Indian Express, 21 August.


• The RBI should end its stop-go policies, Lars Christensen in Mint, 21 August.


• Credibility crunch, Sanjaya Baru in the Indian Express, 20 August.


• Let the rupee sink, Andy Mukherjee in the Business Standard, 20 August.


• The needless battle, by Ila Patnaik in the Indian Express, 19 August.


• Editorial in the Business Standard, 18 August.


• Editorial in the Indian Express, 17 August.


• India Inc hedges its bets by Ila Patnaik in the Financial Express, 16 August.


• Editorial in the Business Standard, 15 August.


• Will the capital controls to defend the rupee work?, 14 August.


• Editorial in the Indian Express, 13 August.


• Govt, RBI fighting a losing battle on rupee, Tamal Bandyopadhyay in Mint, 13 August.


• We don't know much about what the exchange rate ought to be, 12 August.


• Should we have picked this battle?, Economic Times, 7 August.


• Don't hold the rupee, by Abheek Barua in the Business Standard, 6 August.


• The collateral damage to banks from RBI, Ravi Krishnan in Mint, 5 August.


• RBI norms on gold imports may deal a blow to domestic jewellers, Dinesh Unnikrishnan in Mint, 1 August.

• Editorial in the Indian Express, 31 July.


• Editorial in the Business Standard, 31 July.


• Rising collateral damage, Sonal Varma in Mint, 30 July.


• Does India need sovereign bonds?, by Ila Patnaik in the Financial Express, 24 July.


• Editorial in the Business Standard, 24 July.


• RBI's rupee rescue mission may hurt government, by Anup Roy, Manish Basu, Kayezad E. Adajania in Mint, 24 July.


• India moves closer to gold import quota to stifle demand, Siddesh Mayenkar and A. Ananthalakshmi in Mint, 24 July.


• Editorial in the Business Standard, 23 July.


• Offshore funds make a killing on betting of movement of interest rates in India, by Sugata Ghosh in the Economic Times, 22 July.


• There is no method to RBI's madness, by Tamal Bandyopadhyay in Mint, 22 Jul.


• Editorial in the Indian Express, 17 July.


• Government paper sales cancelled after investors demand high yields, Anup Roy in Mint, 17 July.


• Editorial in the Indian Express, 16 July.


• Step back into the ring, by Jahangir Aziz in the Indian Express, 16 July.


• RBI, SEBI attack currency speculator; but rupee stays intact, by Mobis Philipose in Mint, 15 July.


• The taming of the rupee, by Ila Patnaik in the Financial Express, 12 July.


• The attack on the market for the rupee is a mistake, Economic Times, 11 July.


• Editorial in the Indian Express, 11 July.


• Losing currency, by Ila Patnaik in the Indian Express, 10 July.


• Editorial in the Business Standard, 10 July.


• Hedging surge prompts RBI inquiry on rupee moves, Bloomberg content in Mint, 8 July.


• Editorial in the Business Standard, 8 July.


• RBI moves to curb rupee speculators, Rafael Nam and Suvashree Dey Choudhury in Mint, 2 July.

• Rupee at 60: the options before RBI, by Tamal Bandyopadhyay in Mint, 30 June.


• How to cap the CAD, by Ila Patnaik in the Financial Express, 28 June.


• Don't try to control the rupee, by Ila Patnaik in the Financial Express, 21 June.


• Do not mourn rupee fluctuations, Economic Times, 11 June.

• Rupee will need support in coming months, Renu Kohli in Mint, 28 May.


• The arrogance of power, 12 May.


• How do you prevent rupee trades?, by Ila Patnaik in the Financial Express, 10 May.

• The rupee: Frequently asked questions, 1 December 2011.

And, you may find it interesting to see an updated picture of the evolution of the Indian exchange rate regime [methodology]:

This graph shows a moving window of annualised volatility of the INR/USD exchange rate for the last 15 years, starting from 28 August 1998. Vertical lines show the two dates of structural change of the exchange rate regime. As we see, we had volatility of 1.84% for 4.74 years until 23 May 2003. Then we jumped up to 3.87% volatility for 3.84 years. This lasted till 23 March 2007. We are now in the longest single period under one single exchange rate regime: 6.42 years spent with an annualised volatility of 8.73%. Through this period, every debate on exchange rate policy ended up in favour of exchange rate flexibility. The floating exchange rate is the only stable long-term option for India.