Rbi Is Overcautious On Rupee: Economist

Mittal criticised the liquidity tightening measures taken by the apex bank to defend the rupee against the greenback. "The classical measure of defending the currency by hiking interest rates is dangerous as it affects all the sectors," Mittal said.

"Especially, for an emerging economy like India it hampers the recovery process," he added.

Mittal described the current stability of the rupee against the dollar as a short-term phenomenon. "The rupee is held artificially stable at the current level. It is likely to fall further," said the economist. "I personally feel that the rupee would be around the 48.5-mark by the end of March 2001," he added.

 

The apex bank seems to have played overcautious regarding its forex reserves. "India has reserves to cover next eight month's import, which is a very comfortable situation. One may point at the high reserves of the east Asian countries in 1997, but remember that India is more comfortable in regard to short-term external debt position," Mittal said.

Indian forex reserves are more than three times the short-term external debt, he pointed out. Mittal feels that there is nothing to worry about the fall in the rupee. "Rising inflation, high current account deficit and rising interest rates in the US made the fall in the Indian currency inevitable," he said.

"Rising oil prices has also affected the Indian economy first by putting pressure on the oil import bill and secondly by pushing up the inflation rate," Mittal observed. However, he expects the oil prices to come down very soon.

The weakening of the rupee is due to some fundamental reasons. "India needs to speed up the reform process to correct the fundamentals. You cannot take an in-between strategy. If you believe in capitalism, you have to go for it whole-heartedly," Mittal points out.

"You cannot restrict the entry of foreign investors to some limit like the insurance sector and expect that there will be large foreign direct investments," he pointed out.

He said that the country's public sector has enough strength to fight in a liberalised environment once they are out of government control.

"The Indian government should take serious privatisation initiatives," the economist suggested. Another suggestion was closure of the sick public sector units.

"Privatisation initially would be associated with the pain of unemployment, but would ensure the future growth and lower fiscal deficit," Mittal pointed out.