Why is RBI Letting the Rupee Fall to 100 | Business | Sarthak Ahuja

Описание: Why is the RBI letting the Rupee fall down to Rs 100 per Dollar... and what will happen if that happens over the next few weeks...

Let’s understand this through the concept of the Impossible Trinity...

So any Central Bank can manage three things:

1/ Capital Outflows from the Country - which the RBI manages by putting restrictions on how much money can people send out in a year... this they do through the LRS, that no person can send more than USD 250k in a year...

2/ Monetary Policy - or what is the interest rate that people earn in India on FDs, and at what rate are loans available to businesses... this they manage using the repo rate

3/ Forex Rate of the Currency - which means if RBI wants, they can sell their Dollar reserves in the merket to create an oversupply of Dollars thus, bringing up the value of the Rupee...

So why is the RBI not doing this?

It’s because any Central Bank can only do 2 out of these 3 things at any given point...

So if RBI starts selling Dollars in the open market... two things happen...

1/ Selling of Dollars means they will start collecting Rupees in return... while it will keep the Rupee exchange rate better, it means there will be lesser Rupees floating in the market...

Lesser Rupees floating in the market means interest rates will have to rise and banks will have to make it harder for people to borrow for growth... and the economy stalls as there won’t be much money for economic growth.

2/ If it starts selling its Dollar reserves, given the shortage of oil right now, India can start burning through its forex reserves of USD 700 Bn at a frighteningly fast pace, which means years of forex will get burnt out and we might see we may not be able to import things from outside of India... and the economy will absolutely tank.
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A Chartered Accountant with about 10 years of experience in areas of Tax Advisory, Startup Consulting, Fundraising, Audits, Deal Advisory, Business Modelling and contract CFO services.
Winner of the ISB Young Leader Award 2017 and the Best All Rounder, PGP Class of '17, Sarthak has also been published about in the leading financial newspapers such as The Financial Express as possibly the youngest Indian to have completed the courses of CA, CS and CMA along with a graduate degree in Financial & Investment Analysis from University of Delhi, all by the age of 23 years