Jamal Mecklai: Keep those dollars coming, guys

MARKET MANIAC

This week's great news (other than the stock market) is that inflation seems well and nigh tamed "" at 3.26 per cent, it is at its lowest level in a year. More importantly, prices are rising very slowly. The wholesale price index (WPI) has risen by just 3.4 per cent since the start of 2007, much less than last year (when it rose by 5.6 per cent over the same period), and the lowest rise since 2001, when global growth was slowing sharply. That prices should be so well controlled, despite 9+ per cent growth, is worthy of applause "" indeed, low inflation high growth had been a hallmark of the China story for several years (till recently, when the inflation side seems to be falling apart).

Of course, India is not China, and even if we are able to sustain this great picture, it will be driven quite differently. For starters, it is clear that the sharp rise in the rupee has been the prime mover of the dramatic decline in inflation, which has dropped from nearly 7 per cent in February this year to under 3.5 per cent today. Given that global commodity-linked product prices carry a nearly 40 per cent weight in the WPI, the stronger rupee has more than offset high commodity prices and strong domestic demand to keep inflation down.

Low inflation is, of course, the be-all of successful monetary policy, even more so in India since it provides maximum benefit to those with the lowest disposable income. When combined with strong growth, it speaks of successful overall economic management "" so, whether or not this scenario was intended or simply a result of circumstances, plaudits are in order for both the RBI and the ministry of finance.

Of course, economic management, like life, is a work in progress and so there's no time to rest on laurels. Despite the fact that growth looks strong "" the index of industrial production has once again crossed 10 per cent and September showed a healthy rise in credit offtake (although it remains below last year's level on a half-year basis) "" the excellent inflation number suggests that the RBI should cut rates at its next monetary policy review. This would not only boost demand where it has been flagging (autos, durable goods), turbo-charging growth, but also take a bit "" albeit a wee bit "" of pressure off the rupee, as pure arbitrage flows would weaken.

Not that this will materially impact overall capital flows. The India story gets more attractive by the minute "" the Nobel Peace Prize acknowledging yet another aspect of our knowledge-based strength "" and, global credit crisis notwithstanding, it is hard to see investors backing away from our shores for anything more than a profit-taking break. This, of course, means that the rupee will remain on track to reach my shockingly prescient forecast made in 2003 that the rupee would reach 38 to the dollar in five years. 2008 is upon us, as 38 appears to be.

Of course, the RBI will continue to ride the wild mustang of intervention, but its grip will doubtless loosen from time to time. Indian companies will be compelled to accelerate their productivity improvements, diversify into the domestic market, and, of course, increase their global footprint.

There are scores of examples of this already happening, even at the SME level. A jewellery exporter I spoke to, who has about Rs 150 crore of exports, was a bit despondent about the strong rupee but has already set up a supply contract with a small but high end domestic chain. He fears that it will take a long time for him to be able to scale up, but the explosive growth in retail investment suggests that he may be surprised at the speed at which domestic distribution develops. Another (much smaller) company that manufactures and exports perfumes remains upbeat about his exports growth and, to contain the impact of the strong rupee, is looking to buy a cosmetics brand to diversify overseas.

The rupee's strength, in the meantime, will continue to keep the economy from overheating, although, to be sure, this will have a limit, and at some point in the future we may see prices start to climb more rapidly again, particularly if the US slowdown doesn't turn out to be too severe.

The good news is that now that the benefits of the strong rupee are there for all to see, the RBI can, by design, toggle between higher interest rates and a stronger rupee to underpin India's inexorable move to double-digit growth. The stock market "" well, it will, of course, be volatile, but it will continue to go straight up.

Keep those dollars coming, guys.