from Follow the Money

The new global norm

November 21, 2007

Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The Washington Post on India, a couple of weeks ago:

Surjit Bhalla, who heads Oxus Fund Management, an economic research firm in the capital, New Delhi, said that the Indian government should manipulate the rupee the way that China keeps the yuan undervalued.

"By intervening, the government will keep the Indian rupee competitive. That is what the whole world does," Bhalla said. "Why should India try to be a hero on a white horse and let our currency appreciate? It is a body blow to our economy, and we end up helping China. The government has created a monster, and I hope they fix it soon." [Emphasis added]

Judging from the pace of Indian reserve growth over the past few months, I would say India  already has a “competitive” rupee policy, not a strong rupee policy.  It has joined the "world."  It certainly is spending a fair amount of money trying to limit the rupee’s pace of appreciation. India's reserves have increased by $40b or so since the end of August.   They are up by over $90b for the year-to-date.    Some of the increase comes from the rising dollar value of India's euros and pounds, but most of it comes from actual intervention in the market.

Comments like these also illustrate why China matters so much for global adjustment; China’s policy choices impact the entire world.    Right now, fear of appreciating against China is a major constraint on the appreciation of other currencies.   After experimenting with a bit of exchange rate flexibility earlier in the year, both India and Thailand look to me to have effectively repegged (though at a somewhat stronger exchange rate).

They thought they had exited Bretton Woods 2.  But countries who compete with China have generally found it far harder to get out that they expected; the price of appreciation is too high.  Alas, the price of (foreign exchange market) intervention is also rising ...

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