|»5 Minute Wrap Up by Equitymaster|
On This Day - 29 NOVEMBER 2011
Can the Rupee be left alone?
In this issue:
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?
Get answers for all such complex issues straight from Jawahir Mulraj.
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.
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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