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Rupee to be a tool in curbing inflation - Views on News from Equitymaster
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  • Sep 22, 2009

    Rupee to be a tool in curbing inflation

    In the past, the RBI always tended to intervene in the currency markets to stem the appreciation of the rupee so that exporters did not feel the pinch. This time around it may end up following a different course of action. As reported on Bloomberg, India's central bank will allow the rupee to strengthen in order to reduce the cost of imports and curb inflation without raising borrowing costs. India has already been impacted hard by the deficient monsoons this season just when the economy was showing signs of limping back to normalcy after the slowdown in growth last year. But since poor rainfall has hampered crop production, concerns of rising inflation have been looming large and the RBI may adopt the Indian currency as one of the tools to rein in inflation. Thus, a rise in the value of the rupee would make the import of crude and sugar that much cheaper.

    Already the Wholesale Price Index (WPI) has entered the positive zone and there are expectations of the same soaring to 6% at the end of the year. Despite that, the RBI may not increase interest rates anytime soon given that India's GDP growth has already taken a slight beating due to poor monsoons. In such a scenario, exporters of course could feel the heat as they have already been battered by the recession in the US and Europe and an appreciating rupee will only add on to their cup of woes. But this time around concerns of inflation rearing its ugly head means that their problems may not get precedence.

    China will not halt its binge just yet
    China may have received a lot of flak in recent times for the asset bubbles that have been forming in the economy due to aggressive lending. But it appears that the dragon nation has no intentions of putting an end to its expansionary policies. China, which had been growing at 11% plus before the global credit crisis unfolded, was forced to eat a humble pie when exports took a beating as recession hit the developed economies hard. And so to meet its growth target of 8% China has been relying on buoyant real estate and share prices to help it meet its target. As a result of this, the chances of the country winding up its stimulus measures appear remote.

    As reported in a leading business daily, China's economy expanded 7.9% in the second quarter after a 6.1% expansion in the first quarter of 2009. This growth was largely led by the stimulus package of 4 trillion yuan unveiled in late 2008 and 7.4 trillion yuan in bank lending in the first half of this year. Given the way the stockmarkets in China have soared' doubts have emerged whether this money is really being channeled into bolstering the country's economy as it seems more likely that it is finding its way into asset markets which means that bubbles are already being created there.



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