Short term measures will work short term.

Even as the Reserve Bank is trying desperately to somehow stop the rupee from falling below 60 to a dollar ministers are rushing around destroying the RBI's credibility by proclaiming loudly that these measures are for a short term only. Earlier this month the rupee fell to 61.21 to the dollar setting off a cacophony of alarm bells for the Congress. The Congress has committed itself to keeping the rupee from falling below the 60-to-a-dollar mark, whatever it takes. However, the Congress has also committed itself to a growth rate of over 6% for the year. Unfortunately for us both are not possible. To protect the rupee the RBI must increase interest rates, not by a piddling 25 or 50 basis points, but by at least 200 basis points, or even higher, so as to control inflation. Indonesia, Turkey and Brazil have already raised rates but the Congress will not let the RBI do the same. Indeed the Congress forced the RBI to cut interest rates 3 times this year even though the Consumer Price Index has remained stubbornly at around 10%. Instead the Congress fellows have been predicting that inflation was definitely going to fall and growth rates will pick up again. Sadly for them the economy is not a balloon that will float up with hot air. So the RBI has been selling dollars to support the rupee so that our foreign exchange reserves have fallen by $985.4 million to $279 billion, which would be sufficient for 5 months of imports. Livemint, 27 July. Even that could be in jeopardy if oil prices jump, a real possibility if the troubles in Egypt and Tunisia escalate. The RBI has also been trying to decrease liquidity in the markets by selling bonds and treasuries and through Open Market Operations. The aim is to starve banks of money to stop them from buying dollars and increase short term interest rates to support the rupee. However, the market does not believe the politicians or the RBI. The RBI sold bonds maturing in 2015 at yields of 8.9982%, those maturing in 2020 at yields of 8.6747%, those maturing in 2025 at yields of 8.4629% and those maturing in 2032 at yields of 8.5747%. This when the Repo rate, which stands for interest rate in India, is 7.25%. Clearly the market believes that inflation will remain high till 2032 which will prevent interest rates from declining. Short term measures do not work long term. Nobody believes liars.