As far as the movement of rupee is concerned, the RBI (Reserve bank of India) follows a mixed policy in which it allows the rupee to move in a certain range and interferes only if it deviates from this range. This policy is also called as "Managed Float". As always, this policy has its supporters and its detractors and I fall in the latter category. Though the facts that I will put forward are true, the interpretation may vary from person to person.
What is meant by "Managed" and "Floating" policies? When a central bank interferes in the Foreign exchange market to keep its currency at a fixed level (e.g. China) it is called as a 'Managed' policy whereas if the currency is allowed to reach equilibrium on its own due to the market forces, it is called a 'Floating' policy.
Indian Industries have been performing exceedingly well in the past decade. The political stability and the consistent economic policies have made Indian industries extremely favored location for investment. There has been a huge inflow of FDI and FII from the US. Due to this the Rupee has been feeling pressure to appreciate against the USD. However the RBI has been frantically sucking out the dollars from the market and has been increasing the dollar reserves to stop rupee from appreciating.
How is a weak rupee bad? Due to this artificial weakening of rupee inflation rose to as high as 6% last year. When RBI sucks out the USD to increases its reserve, it has to pour out rupee in the market. This creates extra liquidity in the market and the value of rupee depreciates. This increases the inflation making daily needed items extremely costly. The people who were most affected by this were the poor who found it tough to survive even though the country was close to double digit growth figures. The gains of this growth were definitely not propagated to the poor.
Rising inflation has the capability of toppling governments. Well aware of this fact, the government has been pressurizing the RBI to bring changes in its monitory policy. The obvious solution in front of RBI was to increase the interest rates and to increase the Cash Reserve Ratio that the banks have to maintain. This sucked the liquidity out of the market controlling the inflation but at the same time slowing the economic growth considerably. November and December have seen considerable decrease in the growth of manufacturing and IT industries. This slowdown has been inappropriately tied to a slowdown in the US economy while it could actually be due to the hard stand taken by the RBI.
The obvious solution at this stage could be to leave the rupee movement alone and let the rupee appreciate. It will be a reflection of our growth and will improve the standard of living of the poor Indians. At the same time the RBI could reduce the interest rates thus easing the policies to pump the mush needed capital to maintain high growth rate.
-Mayank
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2 comments:
Question from a friend::Not convinced. Atleast in IT sector, I feel APPRECIATION of Rupee in the main culprit....along with US recession (less demand)
My Reply
This is a very valid point that you have brought up here and I wanted you to bring it up. I have very strong reasons to believe that the companies in the IT sector in India need drastic improvements in efficiency. The government and the RBI can protect this sector by preventing the rupee from appreciating but this will only pamper the IT companies and will not make them competitive in the long run. Just like the companies made themselves leaner and more efficient after the .com bubble burst in 2000, they must concentrate on doing it again now. The productivity per employee is the lowest in the Indian IT companies. The employee expectations of promotion and incentives are unrealistic as compared to global standards. The attrition rate is high and the improvements in work culture have been stagnant over a long period. Also the Indian IT companies and BPO have not moved up the value chain. They are still looked at good places for getting the simpler and cheap jobs done. Under these conditions, the appreciation of rupee is in fact taking business away from them but they can again be as profitable as before by improving their own standards and increasing productivity. Simple solution like making the bench lighter, giving salary hikes based on company performance, encouraging innovation will help
Jitendra: you seems inclined toward free float currency ...but if the rupee remains appreciating then what about the exporters who are also in highly competitive segment who are turning bankrupts because of strong rupee.one of the largest exporters in textile already sold to blackstone .
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