The smoke signals...

IIPM, GURGAON

What’s more, it can get even worse. With the rupee going through the roof against the dollar, there are good chances of growth dampening in the coming quarters. There’s no doubt that rupee appreciation has already been denting exports and the problem is that there’s no stopping it. Foreign capital inflows have fuelled a significant appreciation in the domestic currency. Currently, the RBI is faced with a situation that’s termed as the ‘impossible Trinity’ – of maintaining fixed interest rates, with a free flow of foreign capital and an autonomous monetary policy. It’s a vicious cycle: it starts with capital inflows, which jack up the rupee against the dollar, forcing RBI to intervene by buying dollars. This in turn increases money supply in the economy that fuels inflation and leads RBI to raise rates. Increased rates go on to attract more foreign capital. Sinha adds, “So far as capital inflows are concerned, they would continue to put pressure on rupee and pose difficulty to RBI in terms of policy choices.” Here’s hoping that the calculation may get a trifle simpler for RBI in times to come… and may the batting line-up for team India only improve hereon!

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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