At sixes and sevens.

Last June the Congress was frantic to stop the rupee from falling to 59 to the dollar. In panic the government increased the the quantity of government bonds foreign investors were allowed to buy, increased taxes on gold and increased interest rates on Non Resident Accounts while the RBI sold dollars to support the rupee. At the time retail inflation was at 12% and a weak rupee was going to make it much worse by increasing oil prices and the Congress feared a rout in the various state elections coming up. In the event the rupee fell to near 69 to the dollar. Now the rupee is come up to 61 to the dollar but the Congress wants the RBI to buy dollars to weaken the rupee further. Because a weak rupee encouraged exports by making our goods cheaper overseas while reducing imports by making them more expensive in India and thus decreasing our Current Account Deficit. The slight appreciation in the value of the rupee led to a 3.67% fall in exports for the first time in 8 months in February to $25.68 billion. India is not going to achieve its export target of $325 in the whole of this financial year, an amount China exports in 2 months. The government raises money through taxes and by selling stakes in public sector companies. However, that is not enough to meet its huge expenditure so the hole is plugged by borrowing from the market which the RBI does by selling bonds. The RBI sold bonds worth Rs 100 billion last month, the last auction for this fiscal. The government being the largest borrower in the market it sucks up liquidity, leaving banks with little money to lend for more productive economic activities, such as investments and new projects. This pushes up interest rates and increases the cost of borrowing for private and industrial investors. To increase liquidity the RBI has been buying government bonds worth Rs 150 billion and injecting another Rs 500 billion through other means. So on the one hand the RBI is selling government bonds worth Rs 100 billion and on the other it is buying Rs 150 billion back from the market. Today we hear that our most revered Finance Minister is not going to stand for reelection, his son is standing instead. In 2009 the friendly DMK was in power in Tamil Nadu but now it is the formidable Ms Jayalalitha. Perhaps it is best not to risk it.