Forex Dilemma 5.

Mr P Chidambaram and his team are fighting the effects of Forex Pile up and not the core problem of unnecessary forex buildup at the cost of supporting US Dollar : Rupee pricing. A major surgery has been due for more than 3 years.

Some of the piece meal measures done by Mr PC and team.
1. Govt cuts petrol, diesel prices to curb inflation.
PTI[ THURSDAY, FEBRUARY 15, 2007 02:00:50 PM]
2. Inflation touches a record level of 6.73%
PTI[ THURSDAY, FEBRUARY 15, 2007 02:00:10 PM]
The items seeing huge price rises are numerous as also double and triple digit increases.
It is futile to list them all here.

In his article in " Business standard " Mr A V Rajwade: Worry about the rupee
New Delhi February 12, 2007, he has the following to say.
"Exchange rates may have a bigger impact than interest rates.
There are three important measures of the value of domestic money:
# The inflation rate, which determines the domestic value or purchasing power;
# The interest rate, or time value of money, which measures what savers get or borrowers pay; and
# The exchange rate, which measures the external value of the currency."

Rupee has depreciated from Rs 51 to Rs 59 against the Euro and similar against the UK Pound Sterling. More than 15 % depreciation in two years.

If the Rupee were to be stabilised against the Euro then the USD rate should have been Rs 37.40 . By suppressing the value of the Rupee artificially, by continuously buying USD in the market, when you already have in abundance the import cost of fuel has been increased unnecessarily thereby leading to spiralling inflation. We could have witnessed ZERO inflation for 2 years which is very good for the people, promoting savings, avoiding wasteful expenditure etc. More so, when we have been witnessing steady increase in the interest rates on borrowing from banks Mr PC and team have lent USD 170 billion on zero interest terms by holding their currency as reserves. Holding for import bills is different from amassing mindlessly. Indian citizens are suffering for the foolhardiness of the rulers. USD currency is not even backed by Gold, but only IOUs. It is like issuing cheques without adequate balance in the account - in common man parlance.

Mr PC and team should do the following immediately., at least now.

[1] STOP purchasing USD currency in the markets for the next 3 months., plain speak stop intervention.
[2] Notify that all exports to countries other than USA should be in Euros and UK Pound sterling.

We can expect some good news.

Dhakshina Moorthy, K.M.