Is Rupee Strengthening an option to curb Inflation????

"Bringing down inflation from the current high levels and stabilising inflation expectations assume the highest priority in the stance of monetary policy,”
RBI in its Quarterly review

9% repo rate, 9% CRR.
Where are we heading to????
Wholesale Price Inflation is currently at whopping 12.1% for the week ended July 26 touching a 13 year high.
Consumer Price Inflation data is not avaliable for the recent week but it is less alarming than Wholesale inflation but has easily breached tolerable levels of 5%.
Majority economists predict the worse is yet not done!!! If majority is to be believed than what will be the immediate next move by the government or the RBI?? Many leading Economists have been intrigued by this question and all have their own way of answering. One interesting answer i came across was Rupee strenghthening.
My assumptions and knowledge, though little, predict this method not viable and has many fallouts.
But lets see what and how Rupee Strengthening cures this WideSpread Social Disease.
A stronger rupee increase Importers margin. How??????? Importers pay in dollars. A stronger rupee means they have to pay less to the foreign suppliers and inturn this increases their profit margin.
How importers making profit can help curb inflation???? If you think about,its quite obvious.
Increase in imports will introduce stiff competition in our domestic market and inducing thereby an explicit downward pressure on the commodity prices. Hence checking the major price increase. This will also be inline with the principles of FREE MARKET, free entry of new players.
All said and done, 4 reasons for not Strengthening rupee in the current scenario.

First, more imports means lesser domestic commodity demand. The IIP(Index for Industril Production) numbers released a month back were pathetic and had an adverse effect on the market. In the midst of all such volatality, Markets wont be able to take another blow in the form of lower IIP numbers. Already interest rates have done the spoil that they had to and now IIP would kill the RBI expectations of Indian GDP to be around 7.9.

Second, a weaker dollar will have a direct impact on American Economy, NASDAQ. And American fall will trigger up a fall in Indian markets also due to Arbitrage and many other reasons. Already the Gulf blames weaker dollar for soaring Crude Prices.

Third, FII's are largely dollar based.Since Dollar reaps lesser Rupees, FII's in India will be at loss. India will therefore become less rewarding for the FII's. This will lead to FII's investing in other developing sound markets like China.

Fourth, but obvious a reason, Exporters loss. Exporters are paid in dollars, that reap them lesser rupees and hence hitting their bottomline hard.

Other non viable option avaliable is increasing the supply side of the graph. But given time and the infrastructure constraints increasing supply becomes a humoungous task. Therefore as we see, to tame Inflation we have to forgo Growth by a percentage or so. Or putting it other way, the opportunity cost of curbing Inflation will be growth be it further interest rates hike or the less likely, rupee strengthening.


Riddhiman Jain