Dinesh Kamath's Editorial 'Rupee weakens considerably' that was published in Newsband

Rupee weakens considerably

The Reserve Bank of India kept its benchmark interest rate unchanged at 6.5%. The Central Bank changed its policy stance from “neutral” to “calibrated tightening”, indicating that rates could either go up or stay steady in the coming months. The rupee weakened past the 74-mark to the U.S. dollar for the first time ever.

With its strict focus on inflation, the challenge now will be whether the RBI can simultaneously manage the various other risks to financial stability. The decision to keep rates steady might also work in favour of the government, which will prefer to borrow at cheaper rates in the run-up to the general elections next year.

The RBI’s decision to not raise rates may lift the sentiments of consumers and businesses at a time when the economy enters the busy season and festival demand kicks in. RBI is still trying to regulate things traditionally leaving the burning issue unaddressed. The decomposition of rupee can be anticipated by focusing on domestic capacity to produce. It would be a tough job to roll back the rupee value if the policy remains so.

RBI runs a pedestrian monetary policy and it enables the government to pay higher interest from the tax revenue to the deposit holders draining the government of possible development expenditure and spending on consumption. The government on its part pays lip sympathy or and focuses on manufacturing except in slogans and the rupee has hit 74 to a dollar and it may go up to 100 rupees at this rate. It is never too late and we can start emphasizing the manufacture of products that we import to cut down trade deficit as the sole objective of the government for present. Why none in the top leadership position takes cognizance of the trade deficit and the damage to the economy and reduce employment potential? is it because there are are other issues that capture the imagination of the people and fetches votes? or "chalthi kha naam gadi" attitude?

The rupee’s graph - possibly upto 80 - will be determined by the price of oil and FPI outflows. Consider the rising interest rates in the West, especially the US. The RBI is right to spare a thought for growth at a time when inflation is reasonably under control. It has a very difficult task on its hands. No point giving in to panic.

RBIs stance is right since controlling inflation is its legal mandate and it has to accord priority to this core objective and in this aspect no repo rate change is right which will tighten the grip for easy bank money policy. Stabilising the sliding value of rupee, reducing CAD rate and other macro factors are also to be governed by RBI.