I disagree with the decision of the RBI to tighten liquidity to stem the depreciation of the rupee. In my view the economy had lost competitiveness due to an appreciation of the real effective exchange rate of the rupee. Subsequent actions by the RBI and the government to put controls on outflows worsened the situation by dramatically undermining confidence in the government’s ability to manage the macro-economy.
The real appreciation of the rupee had been fully corrected by the time it crossed Rs.65/$. Further movements are due to the lack of confidence in government’s ability to restore economic growth. I would recommend a Macro Pivot: a reduction in government consumption/subsidies and a loosening of monetary policy (through an interest rate twist) to raise government saving and promote private investment.
As for the suggestions that we should increase our oil imports from Iran as we can pay in rupees, the assumption that Iran is willing to export any amount of oil we want in rupees is factually wrong. And even if we enter into currency swap pacts with other countries, swaps are short term measures that the RBI has undoubtedly already taken.
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