There is a growing sentiment that the Reserve Bank of India’s (RBI) recent actions to stop the rupee’s weakening is like a doctor fighting the symptoms, and not the disease itself.
That statement massively misses the point. India’s economy doesn’t need a couple of pills from the RBI, the country’s central bank. The ‘take a cut in interest rates and call me in the morning’ approach is appalling misplaced. The economy needs a surgeon, in this case the Indian Parliament, who can remove the blight of corruption and perform some major economic reforms. Anything less will only prolong the rupee’s descent.
That the RBI’s efforts are ineffectual are largely self evident. On Friday, the rupee fell through the 62 (rupee to the dollar) threshold for the first time, despite increasing efforts to halt the slide. However, the RBI’s efforts to staunch the bleeding, such as restricting the ability of individuals and companies to send money overseas, is souring the business environment, especially among foreign corporations operating in the country.
If the rupee is left to depreciate further, there will be negative consequences, such as an increase in the nation’s fuel costs, which are generally priced in US dollars. However, there will also be some positive benefits, such as an increase in remittances from non-resident Indians looking to take advantage of the exchange rate.
Such a scenario is still preferable to one that scares away foreign investors and ignores the need for economic change and tighter controls on corruption.
In simple terms, the RBI needs to stop trying to save the rupee.