REER is today's cobra?

"Politicians turn left when in doubt. Experts follow them," wrote VA Nageswaran. "When in doubt, they recommend stimulus -- government spending, lower interest rates and cheaper currencies." His advice is, "Be sure of what you want." According to the Bank of International Settlements, or BIS, the Real Effective Exchange Rate, or REER, for the rupee is overvalued by 17%, but "the Nominal Effective Exchange Rate (NEER) of the rupee is below 80 as per RBI calculations", which means that "in nominal terms, the rupee is competitive". Exports are weak, not because of the strong rupee, but because of low productivity. Our external debt is $345 billion, so if the rupee depreciates by 2% the liabilities will rise by $7 billion straight away. The government has been collecting Rs 48 on every liter of petrol in taxes, which has been a huge boon for revenues. Severe criticism for the recent rise in prices of fuel has forced it to reduce excise duty by Rs 2, having increased it 11 times since coming to power, by 226% on petrol and by 486% on diesel. If the rupee falls the price of oil will rise instantly and the government will lose more revenue. The Reserve Bank has been buying dollars to keep the rupee from appreciating too much, so that our reserves have crossed $400 billion. The problem is not with the rupee but with our markets. Foreign investors have been pouring money into our stock market so that the forward valuation of the Nifty index is at 20.35. The average for the last 10 years was 15.86. Foreigners have invested $19.76 billion in our debt market, suppressing yields. High interest rates compared to developed economies is attracting foreign funds into short term government debt, and hardening the rupee. Buying dollars keeps the rupee from becoming too strong but this releases more liquidity into the market which the RBI has to mop up by selling bonds. It has to pay interest on these bonds which reduces its income and the surplus it can transfer to the treasury. Interest on its foreign currency investments are low, so the RBI is losing on that as well. Who gains from a strong rupee? The government gains because cheaper imports, especially oil, keep inflation under control and make a case of lower interest rate, wrote TK Arun. Since the government is the largest borrower a lower interest rate reduces its costs. Foreigners are gaining by carry trade, in which they borrow money cheaply in another country and get higher returns here. Reduce interest rate to bring down the rupee to boost exports and jobs. Beware of the Cobra Effect, wrote S Bakshi. When the British announced a reward for dead cobras in Delhi people started breeding cobras, which ended up by increasing their numbers. Strong rupee or weak, which is the cobra?