Wednesday, July 9

Weak Rupee Good for the Growth

We all know and are worried about the weakening Rupee against Dollar.
But RBI may let Rupee weaken against Dollar even if its inflationary in the short term. Besides, weakening Rupee is expected to reduce volatility on the external front.
India is witnessing a High Current Account Deficit. this means that on a trade weight basis, there is a downward pressure on Rupee. Some (including the new Govt supporter the Samajwadi party) are asking the Govt to appreciate Rupee using Forex Reserves. But if Rupee is kept artificially high, it will widen the deficit by encouraging imports although it will make oil imports cheaper. This would lead to instability in the economy.

Globally, economies are expected to follow tight monetary policy and the there are still signs of the US getting into a recession. This has led to a great uncertainty on the flows of funds globally.

China was expected to appreciate Yuan and this led to hot flows of money in China. Consequently, this has led to instability in Chinese economy.

If RBI steps in to appreciate Rupee, it will have to use forex reserves. This will subsidise the FIIs exiting the country. On the other hand, a weak rupee would act as a deterrent to such outflows.
Weak Rupee makes exports highky competitive which is positive for the growth and leads to increase in Fores Reserves. And since most exports are employment intensive, this is surely expected to boost growth.

Let me place a disclaimer: This post does not endorse my views and has been summarised from a report in the Economic Times dated July 9, 2008. U may have your own arguments and comments. Do post them here. Thanks
:o)

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