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Commentary

Inflation, Oil and Exchange Rates

Inflation is at 7.85%, a 44 month high. And oil hits $128 for reasons unknown, but everyone speculates on the causes.

With the INR-USD rate at Rs. 42.5+, the cause is said to be oil refineries increasing buys. But why isn’t RBI selling dollars like crazy and keeping the exchange rate stable? It’s silly to say at one end that they won’t use the exchange rate to control inflation, but then watch the exchange rate go the other way and hurt inflation MUCH MUCH more.

There is literally no interest-rate arbitrage happening – otherwise we would have hugely balancing funds coming in to take advantage. In fact the dollar rising removes the arbitrage completely – as the 5% differential in interest rates is taken away by the 5% fall in the rupee.

There is a need, to get the exchange rate to Rs. 38 or lesser immediately. If they really want to control inflation, that is. But if they really do not interfere, I believe the markets will take it down to there – or even to levels of 35 very soon.

Interest rates are going to have to rise eventually as governments increasingly see a need to demonstrate some action, even if that action does not amount to any real change. See what they did with commodity futures – banning trading in potatoes, which has actually DECLINED in value this year.

It’s not the result, but the action that counts. Our country is doomed to behave, financially, like a Balaji Telefilms TV serial – all emotion and no substance.

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