Sunday, March 14, 2010

The purpose of Exports - Part I

Being the first post of my blog, I thought that it would be best that I start off with a topic that is often discussed.
Exports in the Indian context have taken centrestage in Economic Policymaking for for over 2 decades now. Successive budgets have granted valuable exemptions to exporters including income tax relief, soft loans and most importantly, India's weak currency policy.

Regardless of what the RBI would like us to believe, the value of the Indian Rupee is not determined by a free market. Let me take you through the steps that lead to this conclusion,
1) When the RBI buys US Dollars(USD) for Foreign Exchange(FX) Reserves it is, in fact, selling Indian Rupees(INR).
2) Our FX Reserves have risen almost continuously apart from a few stray quarters when they have fallen. This means that over the last decade or so, the RBI has been selling more rupees than it's buying back.
3) With the sole creator of INR selling it virtually incessantly, the market for the currency is distorted.
4) The exchange rate for INR is an outcome of these distorted market dynamics and not a result of free market pricing.

This FX 'intervention', apart from weakening the currency has many other undesirable outcomes which have a direct impact on many aspects of our day to day existence. But before we begin to discuss these, it is important to discuss and understand why we do it in the first place. ...... Continued in Part II

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