For a country like India, today both the exchange rate and inflation are not heading in the right direction. The rupee is weakening against the dollar whereas the inflation is rising. At this time it becomes important to understand whether the government should take measures to control exchange rate or the inflation.
Lets consider that the government gives more priority to exchange rate. The rupee is weakening against the dollar. To strengthen rupee, the government can only sell the dollars it has. This will strengthen rupee. But what will be the repercussions? By selling dollars the dollar reserve with the government will lessen. With less rupees the imports could be hit, which may actually lead to inflation due to less supply!!
The government will then have to resort to borrowing more dollars and weaken the rupee again. Borrowing may hurt the government fiscal more and weaken the economy and rupee even more. Due to weakned economy FIIs will be less interested in investing in India and hence will not infuse more money in the country.
So it makes no sense to manage exchange rate over inflation.
On the other hand, with inflation under control, there is a chance of business growth. Although inflation control measures are always a damp-ner for the businesses, but with inflation under control common man will be more buoyant about the economy. With more business, the economy and thus the rupee is likely to become more strong.
In the view of raghuram rajan, exchange rate should be left upto the market forces and government should take care of inflation.
No comments:
Post a Comment