A finance ministry official hopes that the rupee will appreciate in two to three months once the economy is back on an upward curve. Common sense could be misleading where technical knowledge of the subject is required. If the economy grows fast, ceteris paribus, it will lead to additional imports bringing further strains on the rupee. Exports depend on the rest of the world — the economic prospects of which are not bright. Has the finance ministry done any quantitative analysis of the income elasticities of demand for exports and imports vis-à-vis the rest of the world to justify the official’s optimism? The Reserve Bank should examine whether the depreciation of the rupee has anything to do with the large-scale forex transactions in the recent period. The heavy repo transactions need to be examined to find out their destinations. Treasury earnings can be sizeable on large transactions, even if the margins are small. The excess SLR (statutory liquidity ratio) investments and large bid-cover ratios at the Treasury Bill auctions do not support the claim of any shortage of liquidity in the market. An ex-post flow-of-funds analysis on a sampling basis will show the amount of transactions justified at any individual bank to enable corrective action on the part of the central bank.
A Seshan Mumbai
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