Technology, Venture Capital, Private Equity

Perspectives from an Indian VC

RBI tightrope

Posted by Arun Uday on May 8, 2007

I guess there would be few who would envy Mr YV Reddy’s job these days, given the various forces and counterforces he needs to balance. Ever since the inflation rate started its climb upwards, RBI has been tightening the liquidity screws to contain the rising prices. Bear in mind that inflation not only has serious economic implications, but with elections not too far away, there are also other political ramifications which put serious pressures on policy making. Raising interest rates was the easiest thing to do to contain inflation, for, debates raged on what kind of impact this increase in interest rates would have on our economic growth. With capital becoming increasingly expensive, it was feared that corporates would find it difficult to pursue aggressive CAPEX plans, which would hinder growth. Also, beyond a point, such increase in interest rates would also start becoming counter productive since it would have a negative impact on supply of goods resulting in scarcity, and hence price increase. Further, this and other factors have resulted in an appreciating rupee, which is scaling newer heights by the day. Its now the turn of exporters (IT cos amongst many others) to cry wolf, for whom a stronger rupee is a turn off, which led the RBI to again intervene and suck out some dollars from the system. Now, I read another article by yet another noted economist that since India is running a large current account deficit and is a net importer of goods, an appreciating rupee may not be such bad news after all. Geez, whats Mr Reddy to do now?? Of course, if I knew the answer I’d be the one hogging air time on TV channels versus Abhi-Ash who seem to be outdoing me when it comes to gaining television coverage these days.

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