Can the Rupee be left alone?
In this issue:
» Roubini does not believe in the Gold Standard
» Which economy can maintain high debt levels?
» Parameters outlined for PSU banks
» Private sector credit in China is high
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Can Europe find a solution to end the current economic crisis?
Will the new economic reforms drive the stock markets?
Are we paying a price for bad democracy?
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Interestingly, the RBI, which in previous years had been active in intervening in the exchange market, has chosen to stay on the sidelines. Its stance being that market forces should determine the value of the rupee and that it would intervene only if it observes heightened volatility in the Indian currency. In the meanwhile, India Inc. has bore the brunt of the sudden fall in the rupee. Many corporates which had hedged their earnings at higher rates, not imagining such a drastic slide, have had to contend with forex losses. Same has been the case with companies importing larger chunk of their raw materials who have had to pay a higher price for the same. As is the case with companies with large amount of foreign currency loans on their books that have had to book forex losses.
Little wonder that many of them are keen that the central bank does something to stem this slide. So is the Reserve Bank of India (RBI) right in not bowing down to this pressure? One of the reasons that the RBI may not be intervening in the markets is due to the current quantum of forex reserves. These seem to have fallen and the central bank does not want to use these reserves solely for the purpose of controlling the currency. Indeed, given how uncertain the environment in Europe is, one cannot ignore the possibility that any intervention by the RBI would still not have stopped the fall of the rupee. Thus, global risk aversion and India's widening current account deficit would have forced the rupee to fall further against the dollar despite the intervention.
Therefore, no intervention means that participants will have to adjust their investment, consumption and borrowing plans according to the availability of foreign capital and import costs. Thus, if the quantum of imports reduces and exports rise, it could ease some pressure off India's widening current account deficit. At the end of the day, the value of any currency should be determined by the economic scenario and market forces. Thus, as long as India continues to harbour a widening deficit and the global economy continues to deteriorate, no amount of intervention by the RBI would do much in stemming the slide in the rupee.
Do you think the RBI is right in not actively stopping the slide in the value of the rupee? Share with us or post your comments on Facebook page / Google+ page.
01:28 | Chart of the day | |
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Data Source: The Economist |
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We don't quite agree with Mr Roubini on this. Isn't the failure of quantitative easing (QE) post the financial crisis of 2007-08 enough proof that money printing is not really a solution? The simple truth is that economic illnesses cannot be cured with monetary pills. And by pumping in money in the economy and by bailing out big banks, the US government has only aggravated the problem.
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04:56 | Today's investing mantra |
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3 Responses to "Can the Rupee be left alone?"
Ramanand
Nov 29, 2011What the European crisis is teaching us (as well as the 2007-08 US crisis) is that in the current globalized marketplace, sovereign currencies can no longer efficiently function as exchange mediums. The root of the problem is simply the fact that sovereign currency is a measure of indebtedness of that country. The more indebted the country is willing to become, the more the currency of that country is available, and vice-versa, if you need more currency of a country, it has to become more indebted.
Questions every Indian citizen must introspect upon:
1. Why is RBI having a foreign exchange reserve at all? Who is it for? Indians? How will it be used? To purchase oil? Food? Who will take it from RBI and go to other countries and import? The Govt? In a market economy, why should govt get into import/export of stuff?
2. Another angle, how did RBI come to acquire 300b in forex reserves? Did it purchase from the forex market? If so, where did it get the rupees to purchase the dollars? Did it print them out of thin air? If so, is this legal? If legal, is it the right thing to do?
3. Do other countries have forex reserves? China does at 2T, japan has 700-800b. Does US have it? No? Why not? How about countries in Eurozone? No??? Amazing! These 2 'developed' regions are among the most suffering economies in last 5 years and India/China/Japan is holding 'reserves' which means they are indebted to us. With their economies in tatters, how will they service this indebtedness? Oh...I remember, they won't! US has already a ZIRP in place for last 3 years, which will likely continue for another 3-5 years at least. Why is RBI holding on to non performing currencies as reserves? particular those that are not only not paying any interest, but rapidly devaluing due to excess govt spending and money printing?
Ganapathy Sastri
Nov 29, 2011It is absurd to blame RBI or Finance Minister for the exchange rate of INR vs another currency. In the first place, European troubles are not the cause for the change that has occurred in the value of INR vis a vis USD. Everyone who had an interest in a particular exchange rate for the rupee has been taken by surprise at the fall of the rupee and hopes for good old days.
The fact is WE THE PEOPLE OF INDIA are responsible for the fall in the value of INR. The market is very discerning and distinguishes strong currencies from weak currencies. The major causes for the fall in the value of the INR are:
A. MASSIVE INFLATION ( over 15% CAGR during last three years) in everything - wages, goods and services, real estate, rentals.
B. MASSIVE TRADE DEFICIT exceeding USD 150 billion year after year.
RBI did the right thing in not selling dollars of which it has only limited amounts. Also we do not the NAV of the country. While RBI says we have reserves of USD 315 B, how much debt does the country have? If you prepare a balance sheet of INDIA INC. the picture may be grim.
sarvotham yerdoor
Nov 29, 2011The depreciation of rupee has been partly on account reckless fiscal policies of the central govt. which is having a deleterious effect on the economy and current account deficits. RBI intervention to shore up the rupee would only cover up the follies of the politicians and the govt. If RBI is able to successfully resist the pressure, the govt would be forced to tread a responsible path.