Intelligentguess

So, now the communists want the government (the government that they themselves support and ensure that it does not take any decisions) to roll back the decision to grant freedom to public sector undertakings to invest a portion of their surplus funds in public sector mutual funds.

Frankly, I support their demand.

But not for the reason that they cite. It’s hilarious. The commies say that this decision would only ensure that foreign investors heap handsome profits. This only serves to show their naivete when it comes to matters of economy and markets.

It needs to be rolled back or should I say modified so that public sector undertakings can invest in all mutual funds, not just those that belong to the public sector itself. This ensures that there is a level playing field for all. No undue or unfair advantage should be provided to select entities based on lineage. Let competition rein and performance decide the turn of events in the marketplace.

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Economist Ila Patnaik has written an excellent piece on the non tenability of India’s currency policy, specifically the Reserve Bank of India’s resolute defence of the Indian Rupee’s spot level against the US dollar.

Coming as it does on another addition of USD 3 bn to India’s forex reserves last week and the upcoming monetary policy statement on Tuesday, the lessons to be learnt from the article are timely.

In particular note the last two paras - repeated here:

A consistent monetary policy is one that is speculation-proof. The Bank of England never gets into a dogfight with speculators. It learnt its lessons in 1992. Now it calmly targets inflation. An inconsistent monetary policy invites speculative capital flows. The policy mistakes of the RBI are a source of risk. They induce unstable speculative capital flows.

The defence of the dollar is the root cause of these difficulties. The task of the credit policy announcement on July 31 is to show an exit strategy from this no-win situation. The goal must be to improve on the messy events of March 2007, when the rupee appreciation took everyone by surprise while the RBI stayed resolutely non-transparent. This requires improved transparency and communication by the central bank, and a programme to increase currency flexibility.

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