IBPS English Comprehension Test 4
Read the following passage carefully and answer the questions given below it.
Prime Minister Shri. Narendra Modi, reportedly, wants a "strong" rupee. The rupee has actually been the best performing emerging market currency in 2014, in contrast to 2013, when it was the second worst performing after the Indonesian rupiah. But more revealing is the real effective exchange rate (REER), which measures the rupee's average value against a basket of 36 currencies after adjusting for inflation differentials vis-a-vis the countries concerned. This indicator may be more relevant, especially given that whatever little weakening the rupee has seen in 2014 about 1.9 per cent has had more to do with the dollar's general strengthening worldwide than any vulnerabilities specific to the Indian currency. Between September 2013 and November 2014, the rupee's REER has appreciated by 10.7 per cent. The REER ruled at 99.32 in September 2013 over a base year value of 100 for 2004-05 meaning, the rupee was undervalued. The current REER, at 109.97, points to an overvalued rupee. The point is that the rupee today is not "weak" or vulnerable, as it was during, July & September 2013.
The US Federal Reserve's mere mention of tapering its extraordinary bond buying programme (quantitative easing), then, triggered massive capital outflows and shorting of the rupee by global currency traders. The current year, by contrast, hasn't witnessed any run on the rupee. Foreign institutional investors have pumped in nearly $43 billion into the
Indian equity and debt markets, despite US Fed completely winding down its quantitative easing and hinting at hiking interest rates (even if not immediately). That being the case, the concerns over the rupee breaching the 63 to the dollar level seem somewhat misplaced. Equally flawed is the yearning for a "strong" rupee and linking it to national pride. A strong rupee isn't a bad thing, if it is accompanied by or rather, is a result of low domestic inflation and rising productivity levels. But a strong rupee that is simply an outcome of volatile capital
inflows only erodes the country's export and manufacturing competitiveness. We have seen this in the past and also know what happens what the tide of capital flows reverses, as in 2013. Modi's government would do better to focus its attention on containing inflation and supply side reforms that help boost productivity levels in the economy. An environment congenial to growth and investment will also help attract foreign capital flows, thereby contributing to a strong rupee. Either way, a strong rupee cannot be an objective as much as the virtuous by product of a growth process that is sustainable and based on sound economic fundamentals.