Fresh from a trip to India, Mr. Feldstein presents an upbeat economic travelogue of the subcontinent. Macroeconomic reforms receive high praise. Mr. Feldstein correctly points out that “sound monetary policy by the central bank has reduced inflation to less than 5% despite the jump in energy costs.” He then asserts that “a floating exchange rate and the accumulation of more than $130 billion in foreign exchange reserves reduce the risk of the kind of currency crisis that hit Asia at the end of the 1990s.”
But it is impossible to accumulate foreign exchange reserves while on a floating exchange-rate regime. If the rupee were floating, India’s foreign exchange reserves would not be allowed to fluctuate and the market supply and demand of rupees would determine the exchange rate. For the past decade, India has been steadily accumulating foreign exchange reserves. In consequence, we know that India does not have a floating exchange-rate regime.
We also know that a year ago the rupee-dollar exchange rate was 43.740 and now it’s 44.400. These rates suggest rigidity, not flexibility. Indeed, over the past year, the rupee-dollar rate has fluctuated even less than the much-maligned Chinese yuan-dollar “inflexible” rate.
India’s recent stellar macroeconomic performance stems, in part, from its stable exchange-rate policy (as does China’s). Mr. Feldstein’s misrepresentation of India’s exchange-rate regime fails to convey this simple fact. More importantly, it injects yet another layer of confusion into a loud and muddled Washington debate about Asian exchange rates.
Steve H. Hanke
Professor of Applied Economics
The Johns Hopkins University
Baltimore, MD 21218, US