5 thoughts on “The fallen rupee”

  1. Agree with you on the government profligacy adding to inflation. MSP, Oil subsidy, insane expenditure, poll based stuff.

    I wonder what you think of the whole FCCB repayment blowup that is coming around, full convertibility of the rupee (another reform!) and of waht Ajay Shah says is insane = CPI inflation at 20% last month!

  2. This is Anantha Nageswaran. I must confess that I am not aware of the external payments that are falling due, their amounts and their timing. But, from what you say, I must concede that it has the potential to exert upward pressure on USDINR. But, it need not be the case if, by then, the Indian Government had done enough to attract inflows or oil prices collapse due to the global slowdown.

    I agree that Dr. Y.V. Reddy that full convertibility of the Indian rupee would bring volatility and crises to India’s shores as long as government finances are so irresponsibly handled as they are now.

    That said, one can argue that it is these potentially periodically occurring crises are what is needed to drive some sense into Indian governments. There is merit in that but we are playing with real people, their jobs and their lives.The moral case for such an approach is, therefore, ambiguous.

    Consumer price inflation in September was 20% according to the blog post by Ajay Shah. This seems to be a proprietary calculation. I cannot comment on it without going through it. Official CPI inflation rates show the rate to be around 9% to 10%. Ajay’s blog post mentions that. That is bad enough. That shows the real rate of interest in India to be around zero per cent. So, the arguments for inflation coming down do sound unconvincing. Perhaps, the RBI had to engage in verbal easing to counterbalance its actions!

  3. Correcting errors in my previous reply:

    I must confess that I am not aware of the external payments that are falling due, their amounts and their timing. But, from what you say, I must concede that it has the potential to exert upward pressure on USDINR. But, it need not be the case if, by then, the Indian Government had done enough to attract inflows or if oil prices collapse due to the global slowdown. In other words, impact of outflows can be offset by fundamental improvements. Flows will matter little if fundamentals are seen as changing for the better.

    I agree with Dr. Y.V. Reddy that full convertibility of the Indian rupee would bring volatility and crises to India’s shores as long as government finances are so irresponsibly handled as they are now.

    That said, one can argue that potentially periodically occurring crises are what is needed to drive some sense into Indian governments. There is merit in that but we are playing with real people, their jobs and their lives.The moral case for such an approach is, therefore, ambiguous.

    Consumer price inflation in September was 20% according to the blog post by Ajay Shah. This seems to be a proprietary calculation. I cannot comment on it without going through it. Official CPI inflation data show the rate to be around 9% to 10%. Ajay’s blog post mentions that. That is bad enough. That shows the real rate of interest in India to be around zero per cent. So, the arguments for inflation coming down do sound unconvincing. Perhaps, the RBI had to engage in verbal easing to counterbalance its actions!

    1. Ananth, Thanks for your reply. The ticking outflow time bomb is only strange because of the government’s inability to attract inflows in other spheres and the panic that’s happening in Europe.

      On the convertibility front, I think the problem is that we are being mollycoddled by policy, which is like Rajiv Gandhi’s statement that “India is not ready fora free press” in the 1980s. And the policy itself isn’t consistent. At one level, the RBI says it won’t intervene when the rupee crosses 52. But when it went to 39, they were all jittery and said they can’t have this kind of volatility and went in to buy dollars. Yes, today, liquidity is tight so they can’t afford to take out more rupees from the system, so they can’t really intervene in size, but it smacks of one-sided-ness. Given that there was no attempt to do it when things were fine (2010), I think the only time we’ll be forced to get CAC is in a crisis.

      I agree with you that the goverment, especially this one, if left free, will easily murder our finances. And that convertibility brings about volatility (though only temporary). The point is: convertibility will force their hand, and mean “less government” in the end – which I think is the only way to fix government, to reduce their influence.

      Lastly, about Ajay’s post – yes, that was a seasonally adjusted number on CPI (IW). Granted, it’s not direct. Interestingly the new CPI (Urban) comes in at about 114 – and the 2010 base is 100 (it’s the average of the numbers in 2010, so we don’t have a direct y-o-y comparison. All inflation numbers are showing some serious upmoves; real rates have been zero or negative, using CPI, for nearly four years now (IIRC).

      Also wanted to add one more question: Do you think the ECB printing (and the US and Japan continuing to print) will show up in their inflation at some point, and if that happens, will it drive up the rupee? Thanks

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