India’s RBI Policy Won’t Strengthen INR against USD – Need Strong Decisions to Curb BlackMoney Economy

July 30, 2013 · Author: · Category: bank 

India’s Central Bank, the RBI introduced two rounds of liquidity tightening measures on 15th and 23rd July, which have served to push market rates sharply higher and brought temporary stability to the rupee, only to bounce back to Rs 60.45 against USD. Subbarao’s last meeting as RBI governor ended in a whimper rather than a bang – all interest rates were left unchanged as had been almost unanimously expected. Subbarao’s most likely successor is the pragmatic Raghuram Rajan who is current the chief economic advisor to the finance ministry.

The guidance paragraph in the RBI’s statement was more dovish than one might have been expected, suggesting that if hadn’t been for the weakness of the currency there was a “reasonable case for continuing on the easing stance”. It also added that “the recent liquidity tightening measures…are aimed at checking undue volatility in the foreign exchange market, and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation.

It seems slightly strange for the RBI to tell the market that it will unwind the liquidity tightening measures as and when the currency has stabilised. After all, by indicating such an approach, it presumably makes it less likely that stability will actually be achieved! Above all, we suspect the wording reflects the central bank’s tricky balancing act between its wish to support growth and its attempt to prevent the rupee from depreciating further.

RBI & Finance Ministry Lack the Will to Touch BlackMoney Economy
The real problem in India is the failure of the current account deficit [Fueled Largely by BlackMoney Investing in Gold by Indians] to show a meaningful improvement in the context of the prolonged downturn in economic growth. This probably partly reflects structural issues, but recent suggestions that exporters are under-invoicing and importers over-invoicing, in order boost their holdings of US dollars, has a ring of truth about it to us. We have certainly struggled to explain India’s poor trade position of recent times as the lagged effects of the rupee’s weakness through the second half of 2011 and the first half of 2012 has seemingly failed to be reflected in stronger export volumes and softer imports.

Also do not forget that Savings Rate in India is at an all time Low because the Corruption by Congress Government maintained the Inflation at Double Digit & hence Indians took shelter under Real Estate another Black-money heaven with Double Digit Compounded Gains YoY.


One Response to “India’s RBI Policy Won’t Strengthen INR against USD – Need Strong Decisions to Curb BlackMoney Economy”

  1. Editor's Desk on July 30th, 2013 23:26

    INR will not settle down until the RBI recoups FX reserves. So, are the July 23 measures working? They have stabilized the INR at about Rs60 / USD (although a weaker US Dollar also helped). Still, we believe the hard reality is that expectations cannot but float up to say, Rs62/USD, unless the RBI replenishes its armory by issuing NRI or sovereign bonds. We can only hope that the RBI is able to withdraw the July 23 measures before the advent of the October-March busy industrial season.

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