Article;
Policy makers running out of time options on rupee.
Comment;
Subbarao is right when
he says that he does not target any exchange rate but his job is to rein in
volatility and inflation. The rupee is already undervalued and its value will
slowly converge to its true value, around Rs 75 (an expectation). The rupee is
depreciating because the American central bank is planning to withdraw its $85
billion stimulus which has sent yield on American bonds up which has made them
more attractive compared to the Indian debt and equity. The Indian government
is trying to bring dollar denominated bonds which can help borrowing dollars to
finance the CAD which I think is not a bad idea in the short-run but in the
long-run we need to increase exports to pay for imports. A low foreign exchange
reserve and demand for dollars has also put the Indian rupee under pressure. It
is an irony that the central bank has put hold on investment by not reducing
interest rates and we want higher foreign investment just to finance the CAD.
We do not need to increase interest rates since interest rates in INDIA are
already high compared to the US and it will choke the economic growth. And,
only economic growth -more production of goods and services- can lower demand
for imports. We desperately need to increase production of goods and services
to reduce imports and increase exports to pay for imports which is only
possible if interest rates come down. But we have paused, as long as, stability
in the foreign exchange market is restored…
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