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Rupee in Free Fall and Galloping Inflation: Can the real Dr. Singh stand up NOW??

"I did it!" - Finance Minister Mukherjee

As we have been talking recently on Drishtikone, the situation in the Indian Economy is rather precarious. And this is reflected in two indicators:

  1. Free fall of the Rupee. In the trading on Friday, the Rupee hit a record low of Rs 54.90 to one USD.
  2. Sky high inflation in double digits. The urban inflation – CPI of 11.1 – is even higher than the Rural Inflation – 9.86.

With both, the currency in a fall and the inflation rising so high, the rates in the economy need to be high. So, there is no room for reducing the interest rates in the economy at all.

The scenario then that we face is very reminiscent of the pre-1991 situation – Lower Growth and Galloping Inflation.

Given that there is little work that the Monetary Policy (administered by the Reserve Bank of India) can really do, it is now the Fiscal Policy (administered by the Government of the day – that should take over.

And, it is here that the Government has been messing up completely!

The government has done little to stem the rot. On the contrary, it has been pouring fuel into the fire by making it more difficult to conduct monetary policy. Not only has it prevented oil companies from raising petrol prices (alleged to be deregulated), but it has let imports rip, and done nothing to curb food inflation, which is largely focused on protein items like milk, eggs, pulses – and vegetables.
In fact, every action of the government – whether it was rollback of FDI in retail, or reversing an eminently sensible railway budget – has been to send the wrong signals to investors outside and inside the country.

With policies that have facilitated high prices and also hitting at the Foreign Investment by coming out with policies that were remarkably short sighted.

The entire Brouhaha over the the cases on Yahoo, Google and Microsoft didn’t help much either.

Cosmetic steps like increasing the interest rates with the hope that people will start investing in the Indian bonds – specially the NRIs – is rather short sighted move and banks on the stupidity of the NRIs (and others). Because anyone with a bit of math skills can figure out the loss one has to take with a falling rupee. Why would I invest at 10% in a currency that has fallen over 20% in the last 2 years??

We need real steps and a real Government. And can the legendary – but elusive now – economist called Dr. Manmohan Singh please stand up?? Or will he make sure that this time he dumps the economy into a ditch that no one can it out of?