With monsoons having been more than generous, one of the biggest factors in rising inflation - food prices - will hopefully be under control.
There are 2 main factors that the RBI needs to be on the lookout for.
One is rising demand - with the seventh pay commission and better prospects for rural economy, this is going to be a big factor - however, because capacity utilization rates are well below peak levels, one can expect that even the enhanced demand will not result in price increases, because there is ample scope for raising production within existing capacity.
The other factor is of course imports - oil imports in particular, and other commodities, high tech products, etc as well. So far, India has pursued a policy of allowing the Rupee to weaken to help its exporters - because that is the easiest way to get precious foreign exchange into the country.
However, in the current context, global demand is quite subdued. Even if we allow Rupee to weaken, it will not really help us generate additional demand. The last 3 years have been a clear example - despite a dramatic depreciation of the Rupee in 2013, IT and textile exporters haven't really benefitted.
On the other hand, in the period from mid 2013 to mid 2014, India had a serious inflation shock, because crude prices were quite high, and the weak rupee made our import bill much larger.
And quite unfortunately, weakening the Rupee to help exporters has actually destroyed the competitiveness of our exporters - whether IT or textiles or jewelry or wherever, we haven't really upped our game to be able to compete effectively at the highest levels. The easy money from the weak rupee has actually damaged our exporters in multiple ways. It is quite criminal that the IT industry is now in a mess, with offer letters being withdrawn, pink slips being issued, etc. Instead of helping the IT industry and other exporters, we have actually destroyed these businesses!
Thankfully, it is not too late - and it is quite possible for us to reverse our weak Rupee policy and instead change it to a strong rupee policy. Let us support our exporters to actually become competitive, instead of giving them crutches that only make them weaker.
A strong rupee policy will dramatically increase the flow of portfolio and non-portfolio investments into India, and will augment our FX reserves in a faster way than is possible by just relying on exporters. It will allow us to kickstart Manufacturing in India for domestic consumption, providing jobs to the lesser educated folks. It will allow us to lower inflation rates, and therefore also lower interest rates.
But most importantly, it is high time we recognize that Purchasing Power Parity actually works against us. There is zero point in saying that we are a rich country in PPP terms. We are only selling ourselves short to the world with this approach. And it makes it tougher for us to face the world. Our tourists find everything more expensive overseas because of PPP. Our companies cannot acquire overseas assets because of PPP. Our athletes find it tough to train or participate overseas because even ordinary things are too expensive.
I hope with the change of guard at the RBI, Urjit Patel will usher in a dramatic transformation in policy. This is the best way to bring about low inflation and high growth as well. As for exporters, well, they better learn to compete without the crutch of a weak rupee!
There are 2 main factors that the RBI needs to be on the lookout for.
One is rising demand - with the seventh pay commission and better prospects for rural economy, this is going to be a big factor - however, because capacity utilization rates are well below peak levels, one can expect that even the enhanced demand will not result in price increases, because there is ample scope for raising production within existing capacity.
The other factor is of course imports - oil imports in particular, and other commodities, high tech products, etc as well. So far, India has pursued a policy of allowing the Rupee to weaken to help its exporters - because that is the easiest way to get precious foreign exchange into the country.
However, in the current context, global demand is quite subdued. Even if we allow Rupee to weaken, it will not really help us generate additional demand. The last 3 years have been a clear example - despite a dramatic depreciation of the Rupee in 2013, IT and textile exporters haven't really benefitted.
On the other hand, in the period from mid 2013 to mid 2014, India had a serious inflation shock, because crude prices were quite high, and the weak rupee made our import bill much larger.
And quite unfortunately, weakening the Rupee to help exporters has actually destroyed the competitiveness of our exporters - whether IT or textiles or jewelry or wherever, we haven't really upped our game to be able to compete effectively at the highest levels. The easy money from the weak rupee has actually damaged our exporters in multiple ways. It is quite criminal that the IT industry is now in a mess, with offer letters being withdrawn, pink slips being issued, etc. Instead of helping the IT industry and other exporters, we have actually destroyed these businesses!
Thankfully, it is not too late - and it is quite possible for us to reverse our weak Rupee policy and instead change it to a strong rupee policy. Let us support our exporters to actually become competitive, instead of giving them crutches that only make them weaker.
A strong rupee policy will dramatically increase the flow of portfolio and non-portfolio investments into India, and will augment our FX reserves in a faster way than is possible by just relying on exporters. It will allow us to kickstart Manufacturing in India for domestic consumption, providing jobs to the lesser educated folks. It will allow us to lower inflation rates, and therefore also lower interest rates.
But most importantly, it is high time we recognize that Purchasing Power Parity actually works against us. There is zero point in saying that we are a rich country in PPP terms. We are only selling ourselves short to the world with this approach. And it makes it tougher for us to face the world. Our tourists find everything more expensive overseas because of PPP. Our companies cannot acquire overseas assets because of PPP. Our athletes find it tough to train or participate overseas because even ordinary things are too expensive.
I hope with the change of guard at the RBI, Urjit Patel will usher in a dramatic transformation in policy. This is the best way to bring about low inflation and high growth as well. As for exporters, well, they better learn to compete without the crutch of a weak rupee!
A Strong Rupee Policy
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