05-16-2007, 09:13 PM
<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><b>Bad 1990s again </b>
The Pioneer Edit Desk
Strong rupee spells disaster
India, being a late starter in the process of climbing the economic ladder, had the opportunity to learn from the mistakes and the successes of countries that have reached the top. One of the single most important lessons that our Government should have learnt was to make the national currency reliable. However, recent experience, plus knowledge flowing from deep within RBI and North Block, combine to make it apparent that the rupee's unprecedented 'strengthening' is the result of yet another policy disaster. Recall Planning Commission Deputy Chairman Montek Singh Ahluwalia's missive to North Block to rein in economic growth rate. At that time, there was concern expressed in these columns over how babus managing the national economy would respond; that concerns seems to have come true. Worried that robust capital inflow was overheating the economy, <b>the central bank bought $ 11.9 billion in foreign exchange. The next month, another $ 2.3 billion was mopped up, taking total purchases since November 2006 to $ 22 billion. </b>We now know the real story behind India's foreign exchange reserve crossing the $ 200 billion mark, but that's for another day. Ignoring what foreign funds were doing meanwhile as a matter of routine - <b>buying local equities - has proved costly because that has added more and more rupees to domestic money supply</b>. Then, the RBI tried to multitask by adding to the money supply, stoking price pressures and tightening policy to rein in credit growth and inflation. But it failed in all respects. By March, it also revived its old interest in buying dollars. This has led to the rupee rising to a nine-year high, leaving both Government and the central bank at a loss as to how to deal with exporters driven to despair, job cuts announced by BPOs and reports of dwindling bottomlines from the small and medium sectors. <b>One wonders if the country is back to the shaky 1990s when industry and finance were routinely hobbled by maverick decisions that led to India being rendered an unreliable trading partner.</b>
However, not all this may be a product of some innocent mistake.<b> There is the odour of a scam hanging thick</b>. How is it that despite all evidence, MNCs are stretching their PR budgets to assure all and sundry that things are fine and that the rupee is not rising at all? And why is the Government silent? <b>Herein lies the story. While small business have been hit by a double whammy (rising inflation plus less export earnings), the big players are partying. They have dollar denominated debts, which means their outflow in dollars remains the same while the rupee obligation reduces. The oil companies are breathing easy. But why is nobody, especially the CPI(M), talking of passing on the benefits to the people? Perhaps the reason lies in its desire to protect the interests of the Japanese MNCs at Haldia.</b> Since more than 80 per cent of exports are value-added items, those lacking the power to build up huge inventories would be left with no other option but to sell cheap. What would cause champagne corks to fly is manna from heaven in the form of double returns on scrips. <b>Foreign investors who invested in Indian stocks have multiplied their returns by twice over that of their domestic counterparts. In the current quarter, Indian bourses have given a return of 5.6 per cent in rupee terms, while that in dollar terms is a whopping 12.5 per cent. Clearly, trouble lies ahead</b>.
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The Pioneer Edit Desk
Strong rupee spells disaster
India, being a late starter in the process of climbing the economic ladder, had the opportunity to learn from the mistakes and the successes of countries that have reached the top. One of the single most important lessons that our Government should have learnt was to make the national currency reliable. However, recent experience, plus knowledge flowing from deep within RBI and North Block, combine to make it apparent that the rupee's unprecedented 'strengthening' is the result of yet another policy disaster. Recall Planning Commission Deputy Chairman Montek Singh Ahluwalia's missive to North Block to rein in economic growth rate. At that time, there was concern expressed in these columns over how babus managing the national economy would respond; that concerns seems to have come true. Worried that robust capital inflow was overheating the economy, <b>the central bank bought $ 11.9 billion in foreign exchange. The next month, another $ 2.3 billion was mopped up, taking total purchases since November 2006 to $ 22 billion. </b>We now know the real story behind India's foreign exchange reserve crossing the $ 200 billion mark, but that's for another day. Ignoring what foreign funds were doing meanwhile as a matter of routine - <b>buying local equities - has proved costly because that has added more and more rupees to domestic money supply</b>. Then, the RBI tried to multitask by adding to the money supply, stoking price pressures and tightening policy to rein in credit growth and inflation. But it failed in all respects. By March, it also revived its old interest in buying dollars. This has led to the rupee rising to a nine-year high, leaving both Government and the central bank at a loss as to how to deal with exporters driven to despair, job cuts announced by BPOs and reports of dwindling bottomlines from the small and medium sectors. <b>One wonders if the country is back to the shaky 1990s when industry and finance were routinely hobbled by maverick decisions that led to India being rendered an unreliable trading partner.</b>
However, not all this may be a product of some innocent mistake.<b> There is the odour of a scam hanging thick</b>. How is it that despite all evidence, MNCs are stretching their PR budgets to assure all and sundry that things are fine and that the rupee is not rising at all? And why is the Government silent? <b>Herein lies the story. While small business have been hit by a double whammy (rising inflation plus less export earnings), the big players are partying. They have dollar denominated debts, which means their outflow in dollars remains the same while the rupee obligation reduces. The oil companies are breathing easy. But why is nobody, especially the CPI(M), talking of passing on the benefits to the people? Perhaps the reason lies in its desire to protect the interests of the Japanese MNCs at Haldia.</b> Since more than 80 per cent of exports are value-added items, those lacking the power to build up huge inventories would be left with no other option but to sell cheap. What would cause champagne corks to fly is manna from heaven in the form of double returns on scrips. <b>Foreign investors who invested in Indian stocks have multiplied their returns by twice over that of their domestic counterparts. In the current quarter, Indian bourses have given a return of 5.6 per cent in rupee terms, while that in dollar terms is a whopping 12.5 per cent. Clearly, trouble lies ahead</b>.
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