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Thursday, April 12, 2007

What RBI wanted

Monetary policy transparency in India is very poor. It's only today - 12th April - that we find out the truth about what the monetary policy was in the month of February. We find that RBI purchased a HUGE $11.9 billion on the currency market - roughly Rs.52,000 crore. That's what I call pouring fuel into the inflationary fire. The implementation of the pegged exchange rate in February, with very little currency flexibility, came at the cost of an inflationary monetary policy. A few weeks ago, when I had written a piece titled `What RBI wants', there was an element of reconstruction of what was going on from fragmentary data. Now the data is out and we know just how bad it was.

Monetary policy regimes break down when the political costs of upholding the regime become unacceptable. In India's case, the INR appreciated from 44.2 to 42.8. Did the people who care more than RBI about inflation pick up the phone? How will things play out from here? In a non-transparent monetary policy regime, one does not know what is going on, or why. Monetary policy is one more stochastic process that economic agents have to cope with.

2 comments:

  1. yeah...........the RBI has messed things up .... Now what?

    ReplyDelete
  2. Dear Ajay,

    To my understanding one of your major arguments has been that RBI should allow rupee to appreciate. Well I have a doubt is that why is RBI not allowing rupee to appreciate and rather choosing to increase its reserves and not sterilize interventions?
    (I feel that RBI is taking the route of CRR hike rather than sterilizing its interventions). RBI knows that if it pumps money in the system, inflation would increase. Why is RBI not targeting inflation and rather it chooses to target exchange rate?

    Firstly is RBI to much worried about exports which are slowing down? I feel slow down in exports could hurt economy and that they are catalyst to growth in India.
    Secondly is RBI looking first to let other regional countries especially china to allow its currency to appreciate. May be it does not want to hurt the competitiveness of Indian exporters in international markets.
    Third what are the risk to the economy if it allows currency to appreciate? Will not the economy be hurt if rupee appreciates? By not allowing rupee to appreciate does it not provide stimulus to exports and hence the economy?

    I would be very grateful if you could answer these doubts.

    Kind regards
    Sumit

    ReplyDelete

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