A strong dollar or a weak one, we can't seem to handle either.

After the recent collapse of the rupee against the dollar, the most frequent question that experts are having to answer is what is the fair exchange rate for the rupee. Since we buy oil and gold in dollars is the exchange rate against the dollar the best guide, in which case the rupee has fallen from parity at independence down to 74 to the dollar today. The government took several short term risky steps to increase foreign currency inflows, such as removing withholding tax on commercial borrowing in rupees from foreign markets, removing the need for hedging for infrastructure loans and increasing the limit of investment in corporate bonds for foreign investors. "The rupee has moved down from 42.4 to a dollar on 5 October 2008 to 73.8 to a dollar 10 years later. That is a decline of 2.8% a year on a compounded average growth rate (CAGR) basis." Trouble is that inflation in India has grown at 4.2% over the same period while it has remained at zero in the US. So it is overvalued against the dollar. The Reserve Bank uses a Real Effective Exchange Rate (REER) against a basket of 36 currencies reflecting our major trading partners. Using this the rupee has also been overvalued. However, Prof R Chinchwadkar points out that using REER the rupee could be overvalued  by 15% but the weight allotted to each currency leads to hierarchy bias. Using the Balassa-Samuelson effect he concluded that the rupee is undervalued by 10%. The Economist tracked data from "41 major developed and developing economies" every week. "It shows that the rupee is fairly valued if one looks at price levels on the one hand and average PPP income levels on the other." So that's alright then. The RBI kept buying dollars when the rupee was too strong, to bring down its value and to build up currency reserves so that it can sell some dollars to support the rupee if it fell too sharply. The government increased duties on import of certain goods so as to increase prices and reduce demand. "India's exchange rate has depreciated more than 13% so far in 2018, exceeding its earlier fall of 12% during the market turmoil of 2013," wrote A Iyer. At that time foreign investors were selling out, as now, and the price of oil was above $100 a barrel. It is around $80 presently. The difference is that we are not panicking this time. What happens in the US could still cause problems for the rupee, wrote VA Nageswaran. If the stock market in the US falls Indian markets will fall as well. Foreign investors will take more money out, weakening the rupee. Increasing interest rate in the US and a rising dollar will add to the pressure. Most people do not understand economics. They will react to how they are affected. Politicians cannot influence events abroad. Dare not annoy voters with elections round the corner. So, Que Sera Sera?