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Wednesday, April 18, 2007

Rupee Strongest in Five Years!

Rupee has breached Rs42/$ and seems to be gaining apparently with no intervention from RBI. I blogged about impact of RBI undermining its own policy of hiking interest rates to control liquidity, in the FX market, and about squeezing the middle class without really controlling excess liquidity. Others have written about the damage RBI is doing in Business Standard and Indian Express and in financial blogs.

Starting sometime in March, it seems, RBI is listening . It looks like RBI stopped trying to keep rupee artificially low pumping liquidity into the economy even while vowing to control inflation. This two year chart says everything.

While foreign goods will become cheaper and demand for these goods may increase even as credit is squeezed, thanks to higher interest rates, and with exports slowing down, excess liquidity may eventually be drain from the economy. Hopefully the economy won't be impacted too much by RBI's actions until now and inflation may finally start moving lower. Just in time for general elections in few years!

But if the economy does cool off to 5-6% because of the damage already done, then all bets are off for the general next elections.

India may finally be becoming a normal country where vast majority of people are interested in their economic wellbeing even as non-economic issues like reservations, religious, and parochial interests continue to dominate governance.