Rupee is depreciating & this is going to impact the economy negatively. By now this line would have become a clichéd stuff to bear. We are told again & again that the rupee is depreciating, then again it is falling, then again a new lower figure comes &this saga continues. The FM is not ready to lay out clear measures & the RBI has to do something, may be something or anything. There are a slew of measures in the recent past, present & hopefully in the future as well that we expect to see. But do we really know what the economics behind the scene is? A quick reading below will help clear some insights in this regard:
1.      Why is so much quantitative restriction on everything?
The import duty has been increased to 8% on gold & it is expected to increase further. Is the measure enough to stop gold imports? Well, I don’t think so. People will invest in Gold because of the traditional value they attach to it.
What to do?
Provide substitute investment measures. Why can’t the investment in gold be dematerialised?  Most basic financial products could be made more attractive.
2.      Relaxation of External Commercial Borrowing (ECB)
ECB is an instrument to facilitate the access of foreign money by Indian companies. Suppose the ECB norms are relaxed then the people would buy money (dollars) in Rupee terms. This will lead to less availability of rupee and more of dollar thereby sucking liquidity from the market.
3.      Sale of sovereign bonds
Selling of sovereign bonds is basically issuing the bonds by government in foreign currency. This will bring in more investment into the country & Dr. Raghuram Rajan supports this measure. Now to bridge the CAD the government is issuing sovereign bond but this option may not always be beneficial as it is subjected to inflation risk. Suppose the government sells the bonds & raises capital say X dollars but at the time of maturity say if the value of rupee further goes down then the same principal has to be paid by shelling more rupees since the purchasing power of rupee decreases.
4.      Limiting Forex Outflows
In order to boost rupee the RBI has recently curbed the forex outflows. The Overseas Direct Investment (ODI) has been limited to 100% of the net worth from 400%earlier. There is a need to spur investments in the country & not vice-versa.

What should the RBI do? Should it keep working on stabilising the rupee or should it target inflation & pay attention to growth?
The central bank has done its bit. Cut money supply in the market, has raised interest rates & sold dollars. But is that bit enough? Only time will tell!



Comments

  1. Unknown15 August 2013 at 02:11

    this gives the whole picture simply yet effectively :)

    ReplyDelete

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