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Rangarajan for managed exchange rate regime
By Our Special Correspondent
NEW DELHI, APRIL 25. The Andhra Pradesh Governor, Dr. C.
Rangarajan, today called for an alert monitoring system on the
exchange rate front in order to ensure that countries benefit
from global capital mobility while minimising the risks of being
hit by a currency crisis.
Presenting the 13th lecture in the Golden Jubilee Seminar series
organised by the National Council of Applied Economic Research
(NCAER) here today, Dr. Rangarajan, a former Governor of the
Reserve Bank of India, said the total net flows to emerging
markets had increased four times during the previous decade from
$53 billion in 1990 to $231 billion in 1996, before declining
after the Asian crisis. However, these increased flows gave rise
to a number of questions, he said, and pointed out that countries
had to ponder whether crisis was endemic to financial mobility or
what should countries do to gain from capital mobility while
minimising the risks of being traumatised by a crisis. Countries
also had to work out the appropriate exchange rate regime,
particularly developing countries like India, and what should
form part of a crisis management programme, Dr. Rangarajan said.
The Governor pointed out that in the new environment of volatile
capital flows and attacks on currencies due to crises, an
appropriate exchange rate management should emphasise three
things. First, the exchange rate should not be fixed to one
currency but should reflect the trading relationships of the
country. Second, the real effective exchange rate (REER) was a
good indicator of competitiveness and should be watched
carefully. Working with a band around the REER was a good policy
in normal circumstances, Dr Rangarajan said. He also felt that a
country required to develop a strong credibility in its currency
and its management and this meant that the underlying fundamental
of the economy had to be sound and perceived policy targets
reasonable. Once these factors were assured, policymakers could
and should take decisive actions in achieving their objectives
when faced with actual or potential crisis, he added.
Overall, Dr Rangarajan argued for further reforms to strengthen
the domestic financial sector and bolstering of macro-economic
fundamentals, particularly the current account deficit. These
were fundamentals to further progress towards increased capital
convertibility, which, according to him, was a desirable
objective if approached in incremental steps. He also argued for
a managed exchange rate regime for India with keen monitoring of
the REER.
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