On his first day at the Reserve Bank of India (RBI), the new Governor strode briskly into his office and summoned his best and brightest staffers to a briefing.
“I see that it is the sliding value of the rupee that is the cause of all our problems — inflation, rising subsidy, trade deficit, tattered global image. Let’s fix the rupee problem first and I’m sure everything else will fall into place. So tell me, who’s responsible for the battering the rupee has received?”
It was the government
“It was this policy paralysis, sir,” said one staffer. “The Government simply failed to foresee that India’s famed demographic dividend would expand its imports.”
“Just consider how our demand for all commodities — from crude oil to power cars to palm oil to fried
“And sir, don’t forget that the aam aadmi is upgrading too. He is consuming more pulses, shunning public transport and fixing up his home with air-conditioners. Our factories simply haven’t kept up with this consumption boom.”
“Hmm… that sounds right,” said the Governor. ‘‘But the government may well have expected rising imports to be matched by exports. Remember how the demographic story was expected to play out? All those young Indians were supposed to join technology companies, write complicated codes and bring in dollar revenues. What happened to all those outsourcing companies which were to join the multi-billion dollar league?’
It was India Inc
“Precisely, sir,” said another staffer. “These corporate chieftains can’t be relied upon. See how they made all these over-priced foreign acquisitions and went overboard on foreign currency loans. They cut corners by not hedging currency risk. Now they want us to rescue them.”
It was the ladies
“True, true” — piped up a white-haired RBI veteran. “But everything would have worked out just fine, had Indian women not taken such a fancy to gold.”
“$46 billion — that’s what we spent on jewellery and bar imports in 2012, doctor. We have done plenty of research on this subject. We have proved that, had Indian women not bought any gold, our trade deficit would be lower by 30 per cent. One can justify importing oil and pulses, sir, but this gold buying is just unproductive, wasteful expenditure. We have tried our best to communicate this to the ladies, sir. It is positively unpatriotic to buy gold, but they haven’t been listening.”
“Yes, yes, I understand’’, said the Governor, ‘‘calm down. But you can’t really cure people of age-old habits, can you? Incidentally, gold has turned out to be a pretty good investment. I see that it has delivered a 22 per cent annual gain while the Sensex managed only 6 per cent in the last five years. And I do seem to remember that the RBI also bought gold from the IMF four years ago to diversify from the dollar. Well, the housewife may like to diversify too, isn’t it?”
It was us
The Deputy Governor spoke up. “The scandal is that some people are blaming us for this mess! We have been crying hoarse about CAD for two years now. Just read 11th point on page 2 of our annual review for 2010-11. CAD has figured in every quarterly statement we have made since then.”
“The trouble is, no one reads our quarterly reviews. They just criticise it on television.”
“Now they have the temerity to ask us why we can’t intervene in the market. How can we? Our currency reserves cover just six months’ imports. And Ben Bernanke is dropping hints about tapering. What timing! We need to keep our powder dry, Rajan.”
It’s the speculators
The central bank’s in-house nerd, a double doctorate in international trade, chipped in.
“It is speculation that is to blame, Governor. The rupee has no fundamental reason to go to 67. Look at the Real Effective Exchange Rate; the intrinsic value of the rupee is 60.”
“The truth is that the currency markets are casinos. We’ve managed to kill off the punters in the domestic market, boss. We’ve made sure the banks have no money to lend to anyone. But now the action has shifted to this under-cover NDF (non-deliverable forward) market. My friends on Wall Street tell me that shorting the rupee is the favourite pastime with hedge funds nowadays; they’re making big bucks on it.”
The Governor countered: “But speculation isn’t all bad. The punters don’t hate India or anything like that. They’re just trying to make money on a trade that is working. If the rupee begins to reverse, you’ll see them accumulate long positions equally quickly. And you need speculators in Indian markets too. Else, who will act as the counter-party to genuine buyers and hedgers?”
It’s bad vaastu
An RBI staffer interrupted the meeting with a phone call. “Governor, it’s our regional manager from Guwahati. He’s unable to leave his office for his lunch break because some astrologers are striking outside the office. They want us to immediately change the new rupee symbol. They say that if we don’t remove those inauspicious lines running through it, we’re headed for 70.”
“They want an appointment with you, sir. They have a new Vaastu -compliant symbol that can hold the rupee at 45.”
The Governor left the room to take the call. When he came back, he said. “You know what all this reminds me of? It reminds me of the movie The Murder on Orient Express . The story was about a murder where everybody seemed to have an alibi. Ultimately, it turned out that every suspect had struck a blow against the victim, with no one knowing who struck first. The detective decided not to prosecute anyone.”
“I think that is what we must do about the rupee. Thankfully, it still seems to have some life left in it. Let’s stop arguing and see what we can all do to revive it”.