Sunday, October 14, 2007

Indian interest rates - they have to go down

Imagine a situation.

House A: The head of the household buys more than he sells. But his household is fast becoming one of the best places to give money to, because they are very productive. Because of rising incomes there was a lot of cash, so the head decided to suck out the cash. Now he has lots of money himself. His money gets added because he buys other currencies so that his exports are competitive.

House B: This household primarily invests. And they have a lot of money which cannot be employed productively within their own assets. So money is cheap. They figure they can easily borrow cheap money from within their household and invest it in the best asset of house A. This is what they do.

House A - India, House B - (basket of $ currencies). $ is cheap and gives low returns, Re is costly and gives higher returns, people want rupees, so rupee will appreciate against dollar. Now if you want to stop that there is only one solution, decrease interest rates. Monetary policy different from that of the fed will be useful only in a few cases, time of join them. Ease out the investment climate that should cool the inflation worries.

Of course the RBI is trying its best, but as Connery says in "The Rock", you also need the prom queen.

Exit, stage left.

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