Carry trades carry increased risks.

Central banks are known to be cautious and the RBI is no exception, wrote M Bhusnurmath. The RBI increased the limit of any government security that can be held by Foreign Portfolio Investors, or FPI, to 30% from 20% and reduced the lock-in period of holding corporate bonds from 3 years to 1 year. This was on top of an increase in the amount of government bonds that FPIs are allowed to hold, from 5.5% to 6% in early April. "Is liberalisation of short term, admittedly volatile, overseas flows the best remedy to tackle emerging pressure points in India's macro-economy? More importantly, is there a danger that RBI, in its search for quick-fix remedies, might have sacrificed hard-won long term stability?" What is the danger? "One it turns the clock back on past efforts to incentivise long-term, rather than short-term, inherently destabilising capital flows. Two, it makes India much more attractive to those looking to make a fast buck...", such as, "the infamous carry-traders who borrow funds at absurdly low rates overseas and invest, typically, in risk-free G-secs at 7-8%". Why is the RBI taking such risks? To reduce the Current Account Deficit, or CAD, which is rising to near 2%, and to bring down bond yields, which are tending to go over 7.7%. The RBI must also be concerned about the rupee which has fallen to a low of 67 to the dollar because of some selling of Indian stocks by foreign funds and higher price of oil. FPIs have been buyers in January and March and net sellers in February and April. However, from January to April they are positive by Rs 97 billion. Why is the rupee falling? Retail inflation in India is always around 3% higher than its major trading partners and exports are weak. Exports were 17.2% of GDP in 2013-14 but fell to 12.4% of GDP in 2016-17, which led to the CAD reaching a level of 1.9% of GDP. The Real Effective Exchange Rate, or REER, is overvalued by 17% compared to 2005 which makes exports more expensive and imports cheaper, wrote H Bhattacharya. Vietnam and Bangladesh have overtaken our garment exports and imports of electronic goods increased to $42 billion in 2016-17 from $3.4 billion in 2011-12. There are many positives for the economy, found A Kapoor. Growth rate has increased, a good monsoon is predicted which should be good for agriculture, a weakening of an overvalued rupee will be good for exports, the bankruptcy code will revive industry and the fiscal deficit is manageable. However, rising commodity prices, the risk of higher inflation and global uncertainties are worries. Never any peace, is there?