Modulated depreciation is salutary - S S Tarapore

.....One recognises the danger of self-fulfilling prophecies, but the least the RBI should do in the immediate future would be to smooth out sharp volatility, but not fight a fundamental exchange rate adjustment. To that extent, the RBI should intervene strongly by purchase in the forex market when the rupee appreciates, but undertake limited sales only to avoid excessive depreciation. The problem is that political economy considerations would not allow the appropriate exchange rate adjustment to take place. This could be unfortunate as monetary policy cannot bear the burden of fiscal imbalances as well as a fundamental disequilibrium in the exchange rate. In the absence of effective policy adjustment, India would face a sharp increase in inflation and a lower growth rate.

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