The current situation of a large Current Account Deficit (CAD), low growth, and plunging rupee is a result of the combination of early withdrawal from the fiscal stimulus and the RBI’s monetary conservatism. There is possibly a way out if credit can be expanded to close the differential between the low end government bond yields and the repo, accompanied by a large push on investments with an appropriately structured Investment Tax Credit valid for the next twenty four months. It could crowd in investments to attract FDI as well as portfolio investments and if the RBI does not allow the current rupee to appreciate in real terms, then the CAD could close, and with reasonable growth. Without these actions, the holding out operations on the currency by the RBI can at best delay the further fall in the rupee, and growth which would have to await a protracted recovery from the expected rise in exports some six months from now.
The Way Out Of The Current Macroeconomic Mess: A Note
Author : Sebastian Morris