The RBI cannot win.

Has the Reserve Bank adopted a wrong strategy regarding the exchange rate of the rupee, asked N Rajadhyaksha. Some people want the RBI to leave the rupee alone while others, especially exporters, want the rupee to weaken so that our goods are cheaper. The rupee is about 7% stronger against the dollar and its Real Effective Exchange Rate against a basket of currencies is up 4.49%. The RBI has been buying dollars from the market so that its foreign exchange reserves have increased to $393.61 billion. However, this is not to keep the rupee weak but to control the large inflows of foreign currency in our stocks and bond markets. Bank of America Merrill Lynch predicts that the RBI will keep on accumulating dollars to shield our economy against an impending global crisis. But this is not without costs. Interest on foreign assets are much lower than in India and buying dollars releases Indian rupees into our banks which the RBI has to mop up by issuing bonds on which it has to pay interest. There is already Rs 3 trillion in excess cash in our banks, so the RBI does not want to add to that. The RBI has committed to buying $16 billion in forward contracts, hoping that liquidity would have reduced when it pays in 6 months time. Has the RBI bought too many dollars? Two important criteria -- "import cover and short term debt cover -- do not suggest that the size of the reserves at this point of time is out of sync with what India has had over the last decade." A strong rupee is fantastic for importers. After rising to over $100 a barrel crude oil prices started falling in 2014 when this government came to power. But the government increased excise duty on oil imports so that retail prices of petrol and diesel did not fall. The high prices were already factored into the economy and so did not affect retail inflation. Currently the price of crude oil is around $50 a barrel. But, the price we are paying is much higher. The ratio of fuel prices to the price of crude oil was around 2 during the previous Congress led government but soared to 5 in early 2016, settling to 3.3 today. If oil prices are steady and if consumer demand is not rising why are imports rising, peaking to nearly 47% in March, asked A Barman. He suggests that there can be only one explanation and that is companies are over invoicing what they import and keeping part of the proceeds abroad. A RBI report said that exporters used to keep 10% of their earnings abroad. Apparently, over Rs 17 trillion is stashed abroad. Now it is the turn of importers. The RBI will be blamed whatever it does. Hope it keeps its nerve.