Exchange-rate and employment...

It would not be an overstatement that in the recent times foreign-exchange-rate policy is centered around exports, employment and growth. The pattern is present everywhere... US, Europe, Japan, China... Even the Make-in-INDIA initiative of the present government is a step in giving Indian export sector a push. INDIA’s export sector, especially manufacturing, is largely underdeveloped and there is a scope for employment generation with relatively low wages. The country so far has concentrated on domestic-demand for growth but now with greater emphasis on manufacturing and exports INDIA is likely to out-pace cooling China which is going through a slow down much like the Japanese and the US style, a deflationary bias in the economy... However, INDIA with a sound policy, even in the exchange-rate...  a little depreciated Rupee to give export and employment a chance... can take advantage of both the positions... An investment inflow and hardening rupee and investment outflow and depreciation... Increasing foreign-exchange reserves during inflows and hardening will help us weather too much depreciation during outflow and costlier imports and also increase our competiveness... Moreover outflow and depreciation will, again, increase export competitiveness. We should use our foreign-exchange rate policy for more productive employment and growth, it would be helpful as far as demand and growth (external and domestic) is concerned... The investment-cycle in INDIA too is soon to kick-in with interest-rate reduction... Good for exports... Depreciation and low interest-cost...

Fed should wait...

A strong-dollar is bad for US’ exports and employment in the country. i think Krugman is pointing in the same direction, more exports, more employment and more growth. Even the QE in US was initially designed to depreciate the dollar by increasing money-supply and give exports a push. Even the whole Europe is on the same track... QE and depreciation... Just the Fed’s signal for a hike can pull out money from emerging market and reinvested in US. More money-supply back to the US is likely to put downward pressure on the rates because money-supply to the economy will increase. The Fed has poured billions of dollars by QE which will return to the economy and that is going to lower interest-rates on government bonds and short-run rates will adjust to the relative money-supply. Whenever money-supply increases it lowers interest rates. In the models they assume no central-bank... when money-supply curves shifts to the right it will reduce interest rates... What will be the effect of money-supply on the dollar is still not clear because the money is already in circulation and will have only a marginal-effect on the dollar... Perhaps the Fed would not like see to US’ exports bogged down by a strong-dollar... The US has lot of potential in the import –substitution area because its trade deficit with China is high. Exchange rate depreciation has always been a centre-piece for countries struggling with recession. Fed should wait because rate hike can make the economy uncompetitive...

Off-date rate cut, again...

Today, again, our RBI Governor reduced repo-rate by a quarter basis points, from 7.75% to 7.5%... But, commentators were trying to find out reasons that resulted in a rate cut without having reference to the latest data... The data for CPI is 5.11% is almost a month old... In January Rajan too delivered a rate cut on an off-date which experts attributed to falling oil-prices and confidence in the inflation glide-path... Nonetheless, the effect of falling oil and transport price/cost is yet to appear in data... May be this time too Rajan has assumed lower prices on the occasion of falling crude-prices and delivered a rate-cut earlier than expected... This time budget too might be responsible for a rate cut... Experts were expecting a rate cut after the budget, but not this soon... on an off-date... which is good from the point of view of ‘timing’... The commitment for fiscal-credibility in the budget has given space to monetary easing, nevertheless for more capital expenditure or infrastructure investment we will also need lower rates... Many times economists reiterate that to remove supply-side bottlenecks we need more investment... The current rate-cut is in line with the current line of thought... Rajan is a supply-side economist too...It is the time to relook at our multi-brand-retail-policy... We need more investment in food-supply-chain-management, in retailing... Good food yet remains out of reach of poor because of prices... Good supply will reduce prices...