Opportunity beckons about once every 10 years – sense and profit is being long the US dollar against the majors, and short against China, and East Asia.
Implementation of two simple policies – registration, not licensing, of foreign portfolio investors, and reduction of interest rates – will make capital inflows non-copious.
In two articles in the Business Standard (Brown Equities, White Profits, Feb. 4, 2006 and Ban FIIs not P-Notes, Sept. 9th, 2006) I I had talked about the license raj that exists with respect to the financial sector in India – specifically, the licensing route for foreign portfolio investments (via the licensing of Foreign Institutional Investors (FII)).
If only Mr. Sinha had realized that he was among the top two Finance Ministers this country has produced (numero uno being obviously Manmohan Singh 1991-1995, and not to be confused with the PM not allowed to function as such 2004-??), he would have written a somewhat different book.
Several economists (including The Economist) offer one explanation after another to justify their predetermined, ideological? and/or confused conclusion that the Indian economy is overheating, and/or that the rupee is mismanaged (read that it should be allowed to appreciate).
Just released data on WPI indicates that for the week ended May 26, 2007, year-on-year inflation had dropped to 4.85 percent, a significant decline over the peak 6.3 percent rate observed in March 2007.
The recent decision by the RBI to hike the CRR by 50 basis point, following up on its tightening by 100 basis points in the short-term rates over the last 12 months, is somewhat surprising (inexplicable?) The rationale: a concern that inflation was getting out of hand; second, that the economy was overheated ; third, that by effectively raising short-term rates by 50 to 75 basis points, foreign dollar inflow might be arrested. [Just the opposite – higher real rates in India will mean more capital coming in]. There were additional reasons as well: a perceived “bubble” in asset prices - Sensex at 14000 and property inflation in selected pockets, especially in RBI’s own backyard, Mumbai. On the surface, seemingly good reasons; in reality, most likely the RBI has practiced “rear window” economics. Stated explicitly, this policy is a boo-boo.
