31 WHERE GOES THE RUPEE?
+The Central bank now has an explicit inflation target of 4%, a level that is almost certain to be breached if the rupee remains at its current level. This is very likely to induce the Monetary Policy Committee (MPC) of the RBl to raise interest rates again in order to dampen inflationary tendencies. But, the MPC must moderate any rate increase. Any sharp increase has an obvious downside risk to it - any increase in interest rates can have an adverse effect on growth. This can actually backfire if profitability of companies goes down. Any 'big' negative change in profitability may make foreign portfolio investors pull out of Indian stocks and actually exacerbate the rupee's woes. The NRI route again Perhaps the best option for the government would be to borrow from non-resident Indians (NRIs) by floating special NRI bonds that have to be purchased with foreign exchange, and with maturity periods of at least three years. Interest rates have to be attractive, and investors must of course be protected from exchange rate fluctuations. Since interest rates in countries like the U.K. and even the U.S. are quite low, the promised interest rate does not really have to be very high by prevailing Indian levels.
* This has been tried before, the last time being in 2013 when too the rupee was under stress. It worked then and there is no reason why it should not work again. Hopefully, the storm will pass over and the rupee will soon find an equilibrium. In the near future, the rupee is unlikely to return to anything below 70 to the dollar. This should not be cause for much concern because the economy will adjust to the lower value of the rupee. What must be avoided is any sharp fluctuation in the exchange rate in either direction. Much will depend on whether the economy can continue to grow at a reasonably high rate, for this will steady the nerves of portfolio investors and prevent them from pulling out of the Indian stock market
Graduate in Economics. Gold medal in Dissertation, Prepared various documents on Demonetisation and GST, Share-trading and many more