RBI Monetary Policy and fall in Indian Rupee

Mid quarter review of RBI Monetary Policy: Will they prescribe lending or mending monetary Policy

When the RBI wise men release the midterm quarterly Monetary Policy, will they stick to status quo or be ebullient to course a new path?

Will they reduce CRR as demanded by many banks including SBI? Already there are strong arguments that money parked by Banks with the monetary authority is ‘dead money’ and no economic activity results from this. If RBI reduces 25 basis points, the banks will get around Rs 3000 Cr which can be recirculated into the system by way of interest cuts or new loans can be sanctioned. Today, CRR stipulation detests them with tinkering with the base rate. The brazen policy of no CRR cut, and if done will fuel inflation has been the cause for less money for loans, less circulation of money, production cuts, and decrease in consumption, which retards growth rate.

RBI is in the excessive caution mode, which results in stifling of economic growth which is around 5.2%.

The Rupee’s has been gathering reverse momentum. It is set to touch Rs 60 to a dollar and may even climb higher to touch Rs 65-Rs 70 sooner or later. RBI’s intervention of buying dollars may at best be a short term effort; it will not give effect to a permanent solution. It may even back-fire, as contended by RBI Governor.

The easy argument is that all currencies are under pressure. There is a silver lining that American economy is starting to glow. It is a sign of recovery. Even if American economy dazzles, what is the guarantee that there will be trade inflows and capital inflows to India. It may be in the reverse direction.

Importers buy dollars and transact while the exporters hold on to their dollars hoping for an even better exchange rate.

Does market sentiment play a role in the diminishing value of the Rupee? It is unlikely because India has a herd mentality among market participants.

Indian Government encouraged commercial borrowings by companies from external sources. Currency risks and asset liability mismatch proved the blunder of Government Policy.

India has Foreign Exchange Reserves of around $ 290 billion. This did not come from export dealings. Foreign exchange from exports were eaten away by the imports which was $ 150 billion more ($450 billion) against export receipt of ($300 billion).This residue of $ 290 billion, are dollars accumulated by RBI through short term flows. They are in the nature of ‘debt’ assets. A portion of the reserves were spent by the benign Government of India  to fund infrastructure.

We have bad economic advisors who do not have the prodigal wisdom to take the right decisions. Country’s economy suffers in the bargain, both in the short- to medium- to long term.