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Commentary, Opinion

What's the deal with inflation and the rising rupee?

To control inflation, the RBI seems to be letting the rupee rise. It closed at its 8 year high on Thursday, at Rs. 42.9 to the dollar. Gains of nearly 5% this quarter means quite a bit. Let’s see – a $1 million revenue will now yield 20 lakh rupees less than last quarter, and 20 lakhs would typically be 10 peoples quarterly salaries.

Now why is the rupee appreciating? That’s RBI covering inflation – the idea being that earlier, the RBI used to sell rupees and buy dollars. This brought more rupees into circulation, which fuelled inflation. Now if it doesn’t sell the rupee, inflation isn’t further fuelled. (doesn’t mean it’ll reduce, it just won’t increase) This simply means demand for the rupee is greater than supply, so the rupee will increase in value.

So how long will this continue? Your guess is as good as mine. Inflation is not ridiculously high – it’s just 6.5% for heaven’s sake, and we’ve had 7-8% in 2004-05. From 5% in June 2004, we went to 7.94% in August 2004 and then back down to 5% in Jan 2005. (If you’re looking for weekly inflation reports, they are here)

Now think back – around the August 2004 time frame, the Sensex was around 4000. In hindsight, would you have bought stocks? Like a TV ad says, “yeh bhi koi poochne ki baat hai?” – with the sensex at 12500 today the question is moot. But at that time, there was a gloom and doom feeling on all media just like today. Inflation is a just a tool being bandied around; don’t be a sucker this time.

Unfortunately, the government is using rising inflation as a stick – to control industries they should not control. Like the ridiculous policy on cement, which can’t be explained better than by Kaushik. First a higher tax on cement, then a deal to freeze prices for a year and finally removing duty on imported cement. And when questioned about why, Kamal Nath, our minister for doing-whatever-it-takes-to-screw-industry, splutters and hangs up the phone – see the video:

We won’t let you earn profits, but we won’t cover your losses either, it seems. They banned futures trading in wheat in Feb 2007, not realising this doesn’t do diddly squat for the prices. This is just a method to control inflation, they say, but in reality, this is not unrealistic inflation, and nothing can control inflation when it’s not out of control in the first place.

6.5% is not backbreaking considering that even conservative estimates expect a growth of 9% this year. Even the World Bank thinks so.

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