Oxford Academic Vijay Joshi, has called for introduction of capital controls to stabilised the level of the rupee against the dollar as sterilised intervention alone has fiscal costs, underscoring the importance of stable exchange rate for a pick up in exports and growth.
Speaking at the LK Jha memorial lecture in Mumbai, Professor Vijay Joshi, Emeritus Fellow, Merton College, Oxford highlighted the importance of exports in economic growth and noted that India’s exports have stagnated over the current decade and partly attributed the real exchange rate which has appreciated.
He said that preventing real eschange rate is tricky as the well-known limitation of sterilized intervention – buying dollars and converting them in rupeeand investing them in government bonds- is that it often imposes some costs, economic and quasi-fiscal.
“It is sensible, therefore, to combine sterilized intervention with targeted capital-inflow controls and/or currency-based prudential controls” said professor Joshi. “Some of these devices are difficult to re-introduce once they are taken off”
He also suggested some more ways to prevent surge in capital lie taxes, withholding taxes, and reserve requirements on certain non-FDI inflows, which can be designed to make tightening and loosening them possible in the face of changing circumstances.
The costs of these various measures may well be less than their benefits for employment, exports, and growth. It is also important to bear in mind that exchange rate policy, like monetary policy, operates with long and variable lags, so a competitive real exchange rate has to be in place for a fair length of time if it is to have an impact.
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