As a student of financial markets for more than 50 years, I hardly recall a parallel to the kind of volatility one has been witnessing for the last few months. To quote just one instance, Monday morning, our time, a pound fetched less than $ 1.70; 24 hours later it was worth $ 1.75!

The USD: INR rate has also been no less volatile. Ironically, I find several exporters, having earlier sold dollars around the Rs 40 level, very unhappy now, although the exchange rate has moved so much in their favour.

One question they should be asking themselves is whether, in terms of their business economics, they would be better off with a dollar worth Rs 35! This unhappiness of the exporters with the rupee's fall is perhaps illustrative of a lack of clarity on various issues:

�Is one trading in currencies or hedging exposures? As a trader in currencies, if I had taken a short position at Rs 42, I would be extremely unhappy with the fall of the rupee. On the other hand, as a hedger who looks at eliminating exchange rate uncertainties, there is no point in regretting the earlier decisions. In fact, one should welcome the change because it improves the future economics of the business so substantially.

�Is treasury a service centre or a profit centre? (In a broader context, most of the woes of major global banks today are attributable to their greed for making money on the trading portfolio.) If at all treasury has to be regarded as a profit centre, there should be clear transfer pricing policies between treasury and the user departments, a proper MIS and extremely tight internal controls. In their absence, looking at treasury to make profits is extremely dangerous as many companies who have used currency derivatives to save costs or earn money, have found.

�Or is the unhappiness born out of ego? For, if the rupee were to go up to Rs 35 per dollar, my ego gets a boost: how wise I was in selling dollars at Rs 42! And, this ego satisfaction too often, and wrongly, more than compensates for the worsening of the future business economics because of the change in the exchange rate.

But to come back to the big picture, I continue to be mystified by the dollar's strength against European currencies since the middle of the year, in the face of a worsening financial crisis. The after-the-event rationalisation of course is the "flight to quality", that is, to US government paper. The supporting evidence of course is the near-zero yields on T-bills. On the other hand, to consider US government paper as "high quality and risk free" is dangerous given the crisis in the financial market, the gargantuan fiscal and current account deficits, and federal debt aggregating close to GDP. The sharp rise of the European currencies in last Monday's trading after Europe announced an even bigger bail-out package for its banking industry, is equally difficult to explain - or even rationalise.

On the other hand, the yen's rise against the dollar is not very puzzling. For many years now, the biggest influence on the yen's exchange rate has been the "carry trade", borrowing or using low interest Japanese currency to make unhedged investments in high interest currencies. Clearly, the extent of such trade would have come down because of the general risk averseness of players in the financial market; banks' reluctance to leverage such bets on the part of, say, the hedge funds; and the lower global interest rates reducing the attraction of the carry.

As for the rupee money and exchange markets, there seems to be general agreement that the central bank will need to be provide rupee liquidity to the banks, and dollar supplies to the exchange market, for the next few months. The question is to what extent the central bank is willing to do so.

The needed support could well turn out to be of the order of $70 bn or so, i.e., Rs 350,000 crore. (This would require a massive restructuring of RBI's assets. The forex assets would need to go down by $70bn, with corresponding increase in rupee assets.) Short term credit in dollars is just not being rolled over and would need to be replaced by rupee credit.

The extent of such short term credit was $49 bn on June 30 as per the BoP data. Add to this the short term money market borrowings of Indian banks' foreign branches used to fund medium term, or otherwise not quickly realisable, assets.

These liabilities may also have to be refinanced from India if defaults are not to occur. One only hopes that the central bank follows its counterparts in Europe and the US in supplying liquidity on the needed massive scale: we would know by Friday