Dealing with the 'crisis'

Normally, an interest-rate hike is a big negative for equity markets, so why did the markets react so surprisingly to the RBI's (surprising) refusal to raise interest rates? But let's start at the beginning. There's this principle called the impossible trinity, which says that you cannot allow free capital flows (India has partially freed capital flows), an independent monetary policy (which India is moving towards, with a clear inflation-targeting mandate given to a relatively 'independent' Monetary Policy Committee) and keep your exchange rate under control. So keeping this textbook economics in mind, the MPC said like a sarkari babu that its given mandate is to keep inflation under control and that has been behaving. And since managing the rupee (levels) is not its job, there's a market to take care of that. Now, that has not been the historical image of the RBI. In fact, the public has always counted on the RBI to 'rescue' them by reading the tea leaves to figure out their 'comfort'. Just last year, the rupee was pushed to the wall by Donald Trump's weak-dollar insistence, when he threatened to put India under surveillance for being a 'currency manipulator'. The RBI found it difficult to absorb all the $20 billion that came in during January-March 2017 and had to let the rupee appreciate. It stayed that way for precisely a year. That resulted in a massive over-appreciation of the rupee, almost 20 per cent to its real effective exchange rate. Then came the current

This article was originally published on December 06, 2018.