Ila Patnaik: RBI’s give-and-take policy
An Op-Ed in the Indian Express by Ila Patnaik - A fresh mandate for RBI - questions whether the Reserve Bank of India’s interest rate tightening will have any meaningful impact on inflation:
- The most important factor that has come in the way of smooth movement of interest rates has been currency policy. When the RBI buys dollars, it pays for them using freshly printed rupee notes. This leads to greater money supply, higher credit growth and inflation.
- Data for RBI purchases only runs till January 2007. From April 2006 to January 2007, the RBI purchased USD 12.6 billion. In other words, the RBI quietly added Rs 56,543.05 crore to the domestic monetary base. It has not been able to fully “sterilise” these dollar purchases, so money supply has gone up.
- There is an erroneous belief that by manipulating the rupee dollar rate, the RBI can keep Indian exports competitive in the world market.
If the RBI were to suddenly stop managing the dollar:rupee rate, what would we see? A drop in our forex reserves, a sharp rise in the rupee vs. the dollar, and lower interest rates?
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