Aug 2, 2000|
The RBI's dilemma
The RBI is in a fix. Earlier, it had surprised (or should we say shocked!) many by opting to raise rates to control the volatility in the forex markets. Now that the markets are once again witnessing volatility, the RBI has few options.
Raising rates to quell the volatility in forex markets is a central bank's ace 'weapon'. Now that the Rupee is once again heading lower, it can only be anticipated that the RBI will once again raise rates. It may seem unlikely that the RBI will opt for a second rate hike in such a short span. But, in the first case too such a measure was widely unanticipated.
There is however one other option. Leave the markets alone. And it is this option that the RBI must opt for. There are several reasons for this. First, depreciation in the value of the Rupee is not totally unwarranted. The high oil prices, large redemptions by FIIs, sharp rise in inflation (inflation based on the WPI is currently at 6% as compared to 2.8% in December) and the government's weak fiscal position warrant a correction in the value of the Rupee. Secondly, a weaker Rupee will go a long way in improving the competitiveness of Indian exports in international markets. The recovery in exports would benefit the domestic economy, which is still struggling to shake off the economic slowdown.
Okay, depreciation in value of the Rupee would affect the country in terms of a higher import bill. Companies that have raised debt in the international markets too would be hit. And not to forget feedstock sourced from international markets would become costlier. However, a 5% depreciation in the value of the Rupee would not overburden us. Given that imports are approximately US$ 40 bn, a 5% impact would raise domestic inflation by 0.5%.
The RBI maybe right in its justification that it is in favour of a controlled depreciation of the Rupee. But as in the earlier instance, there were other means to control volatility. Imposing higher interest rates has connotations for the investment economy, which, it must be mentioned, is still sluggish. The markets only hasten the process (admittedly they often overshoot) of price discovery. Their verdict is final (as seen in Southeast Asia and off late in case of the Euro) and is usually well informed.
The RBI is in a dilemma. Its ace card has already been played and yet the other 'party' continues to gain in strength. Probably the RBI will see reason in market movements and take measures to control only the speculative activity. Blanket measures (like raising rates) hurt all sections, including speculators in forex markets (which form a very tiny part of the economy). Therefore it can only be suggested that the RBI limit itself to talking down speculation. Leave the rest to the markets. And if the depreciation still continues, let's remind ourselves that speculation also encompasses buying undervalued currencies!
Click here for a comprehensive coverage of the Indian Economy
More Views on News
Jul 25, 2017
Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?
May 27, 2017
What happens when minority shareholders are short-changed in the normal course of business?
Feb 15, 2017
PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.
Aug 24, 2016
And here's your chance to claim a free copy of this book...
Aug 12, 2016
And Why India's demographic dividend could turn out to be a doubtful debt...
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407