The RBI’s act of squeezing liquidity is a sign of pragmatism. The
sudden act by the FED in USA has made this mandatory although in the long run
it may have some negative implications. But at the moment the worry is about
the volatility of the rupee with that of the US dollar. It is no small matter
that the speculators in the currency market are powerful and smart and may even
destabilize the economies of weak countries through their excesses and
ruthlessness. It wouldn’t be surprising that at this juncture there might be a
few cartel formations in the currency market to make the kill and if this done
successfully the rupee might even go below 62/63 levels. It is surely not their
love for dollars that these speculators are making the kill rather to swallow
the double bounty. The huge outflow of dollars from the country will make them
very good predators to a helpless equity market and then would once more enter
the equity at dead cheap rates at a later stage. One cannot dismiss lightly the
fact that the FII’s are as active or simultaneously exploit both the equity as
well as the currency market for huge gains.
The RBI act would be positive for the rupee to stabilize backed by the
reform that the government is set to roll out in an emergency way. Any flight
of capital from the equity can be checked if this is a realistic move beyond
just lip service.
Talking about lip service the FED has just done that and one cannot
help looking at the volatility all over the world. However, the FED may not be
able to adjust to the huge inflow of dollar as it would always be a lot of money
chasing very few goods in US. There are chances of the all time low inflation
too shoot up drastically. Here too the speculators would try to make a killing,
one way or the other. FED has again shown signs of not immediately tapering of
bond purchase. This is again lip service. Therefore, there is confusion in the
market as to whether there will be some tapering discreetly or not and how much
within what period.
Now looking at India’s position the outcome can be dangerous with rupee
overshooting below the existing rate. The world today is facing unreliability
of the monetary channel alone for growth.
First, it doesn’t bring about the necessary revival relative to the
amount of liquidity. Again, there is only slight change in the growth of
manufactured products as well as employment. In India the Sensex has crossed
20,000 yet there is no perceptible change in manufacturing or employment. This
is even after the FIIs have brought in a lot of money.
Then what needs to be done? There must be organic growth in the economy
and the opening of sectors for FDI investments is one such way. The FDI would
bring in money for long turn and wouldn’t go around speculating like the FIIs
with an eye for short term windfall. The next urgent step is to bring out land
reforms and also tame the black economy in particular at the real estate and
construction levels. Organic route will not effect inflation as money doesn’t
go directly into the hands of the people but remain blocked in projects even in
spite of the fact that workers would get their wages and spent the same.
Read: Mystery of the Mysterious
Inflation and organic and inorganic growth at www.econobusichange.in
For the above to fructify not the RBI but the government must take
steps that lead to growth trajectories. A lot of projects that have been
blocked must be allowed to start off immediately. If the economy shows some
robustness then the FII's too would rush in with the fear that they might loose
out if they don’t remain in the Indian equity market. The automobile sector can
grow only when there is steady money flowing through employment in people’s
hand and not through speculative money around. This again means sufficient
number of long term projects. So also
with the rest of the products produced in the country.
