INSUBCONTINENT EXCLUSIVE:
exchange rates to stand in its path
interest rate at 6.5 percent on Friday
And by delaying the much-debated quarter-percentage-point increase, policymakers signaled their tolerance of financial instability.
That
Until recently, the mandarins in New Delhi had muddled the message by hinting they were comfortable with a weaker currency, as long as the
RBI softened the decline by selling dollars from its $400 billion war chest.
Such sangfroid, less than a year before the next general
election, was just bravado.
A record-low rupee was only going to lead to a vicious cycle of costlier imported crude oil; fatter fuel-subsidy
bills; bigger concerns about an already-bloated budget deficit; higher bond yields; a more desperate flight of investors from equity and
that the long-term neutral rate is somewhere between 2.5 percent and 3.5 percent, and the short-term equilibrium rate even higher.
So, as is
And the central bank blew it
Granted, inflation, at a tame 3.7 percent, doesn't really justify a rate increase
But the current-account deficit, set to breach 3 percent of GDP in this fiscal year, is above the danger mark.
Tinkering with higher import
Bank Indonesia has raised rates five times since May and spent 10 percent of its foreign-exchange reserves; and yet the rupiah hovers near a
Meanwhile, the rupee has tumbled 13 percent this year, more than the 10.7 percent slide in the rupiah
Maybe India will resort to its usual fallback and ask overseas citizens to deposit dollars with local banks at high interest rates
That strategy did work during the taper tantrum
Trying it now, when Libor is 10 times its levels in 2013, will be expensive.
For emerging markets, the impossible trinity of a fixed
exchange rate, independent monetary policy and open capital accounts has started to fold into what economist Helene Rey calls an
Floating currencies are of little use in the face of a global tightening cycle
(This column does not necessarily reflect the opinion of economictimes.com, Bloomberg LP and its owners)
